Financial goals are the foundation of personal finance. Developing strategic financial goals creates a sense of clarity and direction of what you want to achieve.
Success depends on your approach to setting and defining your goals. Financial goals should not be generic such as ‘setting aside an emergency fund’, ‘purchasing a home’, or ‘saving for retirement’. These general goals would mean something different to each individual goal setter. To better understand and achieve your goals, you need to be more definitive and specific.
While most of us have been exposed to the SMART (Specific, Measurable, Achievable, Realistic and Timely) methodology at some point in our lives, have you ever considered how it applies to setting financial goals?
Let’s take the general goal of “setting aside an emergency fund” and turn it into a SMART financial goal.
SPECIFIC: Make sure your goal is clear and unambiguous. Avoid being vague by ensuring your goal addresses the five W’s: Who, What, Where, When, and Why.
MEASURABLE: A measurable goal has a clear definition of success, in which you can measure. Think about how you will know when your goal is accomplished and incorporate this into your goal. Typically, this involves a dollar figure you are working towards.
ACHIEVABLE: An achievable goal is one that you can attain. If you earn $80,000 per year after taxes, setting a goal to save $85,000 in one year is likely not achievable.
REALISTIC: It is important that your goal be realistic. Look at your fixed expenses, and other commitments, and come up with a realistic goal. This may involve some research into your spending and saving habits to make sure it is possible.
TIMELY: Make sure you include a specific time-frame in which you plan to achieve your goal. A commitment to a deadline keeps you focused on achieving your goal.
Using the above SMART metrics, our goal can now become “I want to save an emergency fund of $10,000 by the end of this year.” This goal is now specific (not vague), has a clear definition of success, has a time-frame, and assuming you are in the financial position to do so, is both achievable and realistic.
The smarter your goals are, the clearer your direction would be. Having a specific goal with a time-frame allows you to measure how you are progressing to reach your goal and track your progress, which keeps you focused.
Now that you understand how to set a financial goal, the next step is to rank and prioritize your goals (assuming you have more than one goal). In a perfect world, you could achieve all your goals at once. However, for the average person, income and resources are limited. Since financial goals are personal to you, determine what is most important for you to achieve first. Ranking your goals from most important will allow you to maximize your situation and help you achieve what is most important in your life.
Periodically reviewing your goals is a key to success. On an at least annual basis (depending on the time-frame of the goal you are setting), you should review your financial goals and measure your progress. You may also find that your priorities and needs have changed which may result in a change of your financial goals.
Start thinking smart and create, prioritize and monitor those financial goals!
~ The Savvy Saver