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“SMART goals” are a powerful method to help you set personal goals and plan for your future. The concept is generally attributed to George T. Doran, who wrote the 1981 article, “There’s a S.M.A.R.T. way to write management’s goals and objectives,” in the Management Review magazine. When applied to financial goal-setting, these five criteria can help you achieve what you want in the future.
Whether you’re saving for a deposit on a house, paying off debt, saving for retirement, or investing, understanding how to create SMART financial goals will help you take control of your finances and future-proof your life.
The acronym SMART stands for Specific, Measurable, Achievable, Relevant, and Time-bound (with some variations):
Is your financial goal S.M.A.R.T.?
Strategies for Creating SMART Financial Goals
Be specific and clearly define your financial goal. Instead of simply saying, “I want to save more money,” consider saying, “I want to save $20,000 in my savings account by 31st December 2023.” This way, you’ll know exactly what you’re working towards and how to measure your progress.
Making your financial goals measurable will help you keep track of your progress. For example, if your goal is to save $20,000, you should be able to measure how much you have saved each month. This way, you’ll know if you’re on track to achieving your goal or if you need to make adjustments.
Achievable (or Attainable)
For your financial goals to be achievable, it’s essential to set realistic and attainable goals based on your financial situation. Saving $20,000 in a year may be achievable for you, but saving $40,000 in a year may not be. This way, you can be more motivated to work towards your goals because you know it’s not impossible for you to achieve them.
Your financial goals should be relevant to your current situation and your long-term goals. For example, if you’re planning to buy a house in the next five years, setting a goal to save for a deposit would be relevant.
Your financial goals should have a timeline and a deadline. This will give you a sense of urgency and motivation to achieve your goal. For example, setting a goal to save $20,000 by 31st December 2023, gives you a clear deadline to work towards. This will help you stay focused.
Here is an example of a SMART financial goal:
“I will save $10,000 in a high-interest savings account by December 31st of this year to be used towards a deposit on a house.”
This goal is Specific, Measurable, Achievable, Relevant and Time-bound because:
- You know exactly how much you want to save and what you want to use it for. (It’s specific.)
- You can track your progress and see how close you are to achieving the goal. (It’s measurable.)
- Having a budget plan, cutting expenses and looking for extra income, you can realistically save $10,000 in a year. (It’s achievable.)
- For you, this is an important long-term financial goal that is in line with your larger financial plan. (It’s relevant.)
- And you have set a deadline of 31st December to achieve this goal. (It’s time-bound.)
By using the SMART criteria to express your goal, you give yourself a clear and actionable plan to achieve it, you can track your progress and make adjustments as needed, and you have a clear-cut deadline to aim for.
When you break down your goal this way, you increase your chances of achieving your goal and set yourself up for financial success.
How SMART are your Financial Goals?
You may already have financial goals set for this year, or you may need to set new goals. Either way, you are off to a great start – financial goal-setting is the first step towards improving your money situation and ensuring you are in a good financial position in the future.
The next step is to fine-tune your goals to increase the likelihood that you will achieve them. We recommend the following questions to help you evaluate whether your financial goals fulfil the SMART criteria. It would be best to write your thoughts down as you answer these questions.
Is your financial goal S.M.A.R.T.?
- What exactly do I want to achieve?
- Who is involved in achieving this goal?
- Where is this goal located?
- Which resources are needed?
- What are my constraints?
- Why is this goal important to me?
- How will I measure the progress and success of this goal?
- What metrics will I use to track my progress?
- How much or how many?
- Is this goal realistic and achievable, given my current resources and constraints?
- How can I overcome any obstacles that may arise?
- How will I know when the goal is achieved?
- How does this goal align with my overall financial plan and long-term goals?
- Is this goal worth the effort and resources required?
- Will achieving this goal have a positive impact on my financial situation?
- When do I want to achieve this goal?
- What is my deadline for achieving this goal?
- What is my timeline for achieving this goal?
Notice that these questions help you figure out the details of your goal. Being specific answers the “what”, “which”, “where”, and “who” of your goal. For it to be measurable and attainable, you mostly ask the “how” questions. Your “why” questions answer the relevance of the goal to your overall life plan. Finally, “when” helps you set a finish line to your goal and situate it in your calendar.
By asking yourself these questions and writing them down, you are committing yourself to work towards achievable and realistic financial goals that align with your overall financial plan and long-term goals.
Strategies for Creating SMART Financial Goals
It’s not always easy to set and reach financial goals, especially when dealing with human psychology. Consider the following scenarios:
SCENARIO 1: Present Bias
John has been working so hard to save money for a deposit on a house. However, he keeps getting tempted to spend his money on expensive gadgets and holidays. He keeps telling himself that he can enjoy these luxuries now and save for the house later, but he doesn’t realise that by not saving for the house now, he’s delaying his ability to achieve his long-term goal of homeownership.
Present bias refers to the tendency to place a greater value on immediate rewards or benefits over future rewards or benefits. For example, you might prioritise buying a new car or taking a long holiday instead of saving for retirement or paying off credit card debt, even though the latter has more long-term benefits.
SCENARIO 2: Procrastination
Emily has been putting off saving for her retirement for years. She keeps telling herself that she will start saving when she gets her next raise or when she’s more financially stable. But she never gets around to it, and she realises that time is running out, and she’s not saving enough to retire comfortably.
When you procrastinate, instead of starting to save for your retirement now, you might put it off for another day and eventually, it might be too late. It’s essential to break down your long-term goal into smaller, more manageable tasks, set realistic deadlines, and hold yourself accountable to overcome procrastination.
SCENARIO 3: Lack of Motivation
Mike wants to pay off his credit card debt but can’t find the motivation to do so. He doesn’t feel motivated to stick to a budget or cut back on his spending, and as a result, he’s unable to make progress in paying off his debt.
Without enough motivation, it can be hard to stay committed to your financial goals. For example, if you don’t feel motivated to save for a deposit on a house, you might not feel inclined to set aside money each month.
To increase motivation, it’s critical to identify what drives you and to create a sense of purpose around your financial goals. This can be achieved by setting realistic and achievable goals, rewarding yourself for reaching milestones, and focusing on the benefits of achieving your goals.
SCENARIO 4: Impulsivity
Sarah can’t resist buying things she doesn’t need. She’s always impulse-buying clothes, shoes, and gadgets, and as a result, she’s not able to save for her future goals, like buying a house or starting a family.
Being impulsive can lead you to make unplanned and unnecessary purchases. For example, you might be tempted to buy things you can’t afford instead of saving up for your children’s education.
To overcome impulsiveness, it’s important to create a budget, track your spending and list down what’s necessary to buy and stick to this list. In addition, it’s important to practise mindfulness and take time to consider the long-term consequences of a purchase before making it.
Do any of these sound familiar to you? Present bias, procrastination, lack of motivation, and impulsivity are just some of the psychological obstacles that can make it difficult to follow through on financial goals. By becoming aware of your own tendencies when it comes to finances and by using the SMART framework, you can make a conscious effort to overcome any obstacle and stay on track. These are a few strategies you can take:
Start small. Sometimes having big goals can be overwhelming and lead to procrastination. Consider starting with small and achievable goals to build momentum and confidence. For example, you can set an initial goal to save $50 per week for an emergency fund. You can opt to increase your minimum amount once saving becomes easy and habitual.
Break down your long-term goal into smaller, more manageable tasks. “How does one eat an elephant?” goes the famous quote attributed to Desmond Tutu. The answer? “One bite at a time.” Another way to make your financial goal easier to tackle is to break it down into smaller parts. For example, if your goal is to save $50,000 for a deposit on a house in 5 years, break it down into smaller monthly savings targets and set smaller deadlines for these small targets.
Create visual cues or reminders, such as a vision board or a goal tracker. Visualisation can help you stay motivated. For example, if your goal is to retire early, create a vision board with pictures of your dream retirement lifestyle and place it where you can see it every day or anytime you need to be inspired.
Identify what drives you and create a sense of purpose around your financial goals. If the thought of being debt-free motivates you, for example, you can create a plan to pay off your credit card debt, starting with the one with the highest interest. Your SMART goal might be to pay off $10,000 in credit card debt within the next two years. You can set milestones along the way to reward yourself for sticking to your plan.
Create a budget and track your spending. A budget is your master tool to show you where your money is going and help make each dollar work for you. It helps you avoid impulse or frivolous purchases and allows you to put money where it’s most needed. If you’d like to save $500 a month for a holiday, for example, track your spending and stick to your budget for the other items so you can have enough money to put towards your trip.
Use technology and automate your savings. Take advantage of technology to help you in goal-tracking, automating savings, money management, and giving yourself reminders. For example, if your goal is to save $50 per week, you can set up an automatic transfer of this amount from your everyday account to your savings account and use apps to record that this has taken place. You can also set your phone’s alarm to remind you weekly to review your financial transactions.
Think long-term. Knowing that you’re delaying present gratification in order to have a better financial future can be its own reward. For example, instead of spending $5,000 on the latest fancy gadgets, you can choose instead to invest that money in a diversified portfolio of investments by the end of the year.
Practice mindfulness when it comes to finances. Take time to consider how a potential purchase may affect your financial position in the long term. For example, if you are considering buying a new car, think of the long-term costs, such as insurance, maintenance and fuel costs, before making a decision. Will this purchase also set you back a few thousand dollars and make your other goals longer to achieve?
Surround yourself with positive influences. Friends and family can support and encourage you to achieve your financial goals. For example, if your goal is to save for a deposit on a house, seek out friends and family who are doing the same or have had the same experience, and share your progress with them. A friend or a spouse can also serve as an accountability partner to make sure you’re on track with your goals.
Seek professional advice or guidance. You might need to ask for the help of a professional financial adviser to help you review your investments and create a personalised financial plan. This can help you navigate various investment options and understand the tax implications of different savings and investment strategies available to you.
Why is it important to set SMART financial goals?
The SMART approach is a time-tested and widely adopted goal development framework used in personal finance and financial planning. Whether your goal is to build an emergency fund, pay off debts, save for retirement, invest, or create a budget, setting specific, measurable, achievable, relevant, and time-bound or SMART goals can help you achieve your desired outcome. It helps give you a clear plan of action and a sense of focus, which can also help you stay motivated and on track to achieve your financial goals.
When goal-setting, it can be easy to feel overwhelmed and unsure of where to start, especially if this is the first time you would be creating a SMART goal. There are also psychological obstacles to consider.
Answering a set of SMART goal-setting questions and following strategies can help you fine-tune your goals to set yourself up for success. By setting SMART financial goals, you can start controlling your money to help make your life future-proof.
Do you require assistance in setting your goals and making smart financial decisions? At Newcastle Financial Planning Group, we provide personalised financial advice and wealth management strategies to help our customers achieve their financial goals. Call us or book online to secure your first appointment with us today and get started!
DISCLAIMER: The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice. Newcastle Financial Planning Group, Central Coast Financial Planning Group, Sydney Wealth Advisers, Coastal Advice Port Macquarie and Coastal Advice Ballina Byron are subsidiaries of Coastal Advice Group Pty Ltd which is a Corporate Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.