We’ve discussed goal setting in financial planning in a number of our posts. In this article, we want to dive deeper into a goal setting methodology known as SMART and how it pertains to financial goal setting. We’ll also provide some examples for common financial goals.
SMART is an acronym that stands for Specific, Measurable, Achievable, Relevant, and Time-bound. When it comes to setting financial goals, using the SMART criteria can help you create clear and effective objectives.
The SMART Framework For Financial Goals
Specific
Your financial goals should be well-defined and specific. Avoid vague objectives like "save money" or "invest for the future." Instead, make your goals more precise, such as "save $10,000 for a down payment on a house" or "pay off $5,000 in credit card debt." Being specific helps you understand exactly what you're working toward.
Measurable
A measurable goal allows you to track your progress and determine when you've achieved it. For example, if your goal is to invest, specify an amount or percentage increase. This could be "increase my investment portfolio by 10% over the next year." Having a measurable target ensures you can monitor your success.
Achievable
Your financial goals should be realistic and attainable within your current financial situation. While it's good to aim high, setting goals that are too ambitious can be demotivating and may lead to disappointment. Consider your income, expenses, and resources when setting achievable goals. For instance, if you earn $40,000 a year, aiming to save $50,000 in a single year might not be realistic.
Relevant
Ensure that your financial goals align with your broader financial objectives and life priorities. Ask yourself why each goal is important and how it fits into your overall financial plan. For instance, if you're saving for retirement, it's relevant to prioritize long-term investments rather than short-term speculation.
Time-bound
Set a specific timeframe for achieving your financial goals. Without a deadline, there's no sense of urgency, and it's easy to procrastinate. For example, if your goal is to build an emergency fund of $6,000, you might set a time frame of 12 months, which means you need to save $500 per month to achieve it. Having a timeline keeps you accountable and focused.
An example of a SMART financial goal
"I will save $15,000 for my child's college education in the next five years by contributing $250 per month to a 529 savings plan. This goal is specific (college education), measurable ($15,000), achievable ($250 per month within my budget), relevant (important for my child's future), and time-bound (five years)."
Why Use the SMART Framework?
By applying the SMART criteria to your financial goals, you can increase your chances of success and make more effective financial decisions. It helps you clarify your objectives, track your progress, and stay motivated along the way. A financial advisor can help you work through the details of SMART goal setting and support you in the creation of appropriate plans to reach them.
Additional Examples of SMART Financial Goals
Retirement Savings Goal
Specific | I want to have $1 million saved for retirement. |
|---|---|
Measurable | I will track my retirement account balance regularly. |
Achievable | I will increase my retirement contributions by 5% annually. |
Relevant | Saving for retirement is essential for my long-term financial security. |
Time-bound | I aim to achieve this goal in 20 years. |
Emergency Fund Goal
Specific | I want to establish an emergency fund. |
|---|---|
Measurable | I will save three months' worth of living expenses. |
Achievable | I will allocate $200 from each paycheck to my emergency fund. |
Relevant | An emergency fund will provide financial security. |
Time-bound | I plan to achieve this in 12 months. |
Debt Payoff Goal
Specific | I want to eliminate my credit card debt. |
|---|---|
Measurable | I will pay off a $5,000 credit card balance. |
Achievable | I will allocate an extra $300 per month to debt repayment. |
Relevant | Reducing debt will improve my financial stability. |
Time-bound | I aim to become debt-free in 18 months. |
Investment Portfolio Growth Goal
Specific | I want to grow my investment portfolio. |
|---|---|
Measurable | I will increase the portfolio's value by 8% per year. |
Achievable | I will diversify my investments and consult with a financial advisor. |
Relevant | Growing my investments aligns with my long-term financial goals. |
Time-bound | I aim to achieve this growth over the next five years. |
Education Fund Goal
Specific | I want to save for my child's college education. |
|---|---|
Measurable | I will save $20,000 by the time my child starts college. |
Achievable | I will set up a 529 college savings plan and contribute $300 monthly. |
Relevant | Providing for my child's education is a key financial priority. |
Time-bound | I plan to reach this goal in six years when my child enters college. |
Final Thoughts
These examples illustrate how the SMART framework can be applied to various financial goals, ensuring that they are well-defined, achievable, and aligned with your financial aspirations. Remember that adapting these goals to your unique financial situation and needs is essential for success. Don’t hesitate to reach out to us today, if you are interested in finding someone to help you with the process.
*Not financial advice
*All figures are for illustrative purposes only; actual figures may vary
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