How to Set Good Financial Goals: Using the SMART Framework

Financial success isn’t just about earning money; it’s about managing it wisely through well-defined goals. Setting good financial goals is crucial for everyone, regardless of their income level or financial background.

So what constitutes a ‘good’ financial goal? In this article we explore the of use the SMART framework in management goal setting, and how we can practically apply it to our personal financial goals.

What is the SMART framework?

The SMART framework, originally developed by Peter Drucker as part of his Management by Objectives concept, is a highly effective tool for setting and achieving goals. SMART is an acronym that stands for Specific, Measurable, Achievable, Relevant, and Time-bound, each of which serves as a criterion for creating clear and attainable objectives.

• Specific: The goal is well-defined and clear, leaving no room for ambiguity about what is expected.
• Measurable: The goal’s success can be quantified or clearly identified, and is trackable in its progress, therefore knowing when the goal has been achieved.
• Achievable: The goal is realistic and attainable within available resources, skills, and time.
• Relevant: Ensures that the goal matters to the individual or organization, aligning well with other objectives and long-term plans. This means that your goals should be relevant as well to your
  • values (including lifestyle preferences)
  • aspirations
  • talents and/or strengths
• Time-bound: The goal has deadlines, which provides a sense of urgency and helps prioritize efforts.

The SMART framework and the MBO principle has been an enduring influence in modern corporate management. It is also a basic management concept that is taught in all business schools, and continues its applications in the workforce today. It is also a very practical and easy-to-understand concept to apply on our individual goals.

Using the SMART framework to financial goal setting not only helps in creating realistic and actionable objectives but also enhances the likelihood of achieving them, providing clear milestones and deadlines along the way.

Why Set SMART Financial Goals?

• Clarity: Setting specific financial goals using the SMART framework helps clarify what you want to achieve. It includes integrating your personal values, beliefs, and long-term aspirations into a practical roadmap for your financial journey.
• Focus: A clear focus helps mitigate poor financial habits like aimless spending or opportunistic investing, ensuring that every financial decision aligns with your broader life goals.
• Motivation: Having tangible, SMART goals provides motivation to save, invest, and make good financial decisions. Relevant goals are rooted in what’s personally significant, offering not just financial rewards but also a sense of personal fulfilment.
• Financial Security: SMART goals are tangible, relevant and achievable goals. Being on a system of a series of achievable gives a sense of financial security and mental relief from one of life’s core obligations.

How to Set Good Financial Goals with SMART?

Identifying and setting good financial goals requires careful consideration and introspection. Here are 7 steps you could take in this process:

1. Evaluate your current financial health: document all your income, expenses, debts, assets, and savings. This comprehensive view will serve as the foundation for informed goal-setting.
2. Identify areas that require immediate attention: one needs to be first financially healthy, before he/she can be successful. Reducing debt, improving credit ratings, saving an emergency cash fund are urgent goals to be prioritized.
3. Reflect and list down personal values, long-term aspirations, strengths, and talents. This reflection will ensure that your financial goals are not only practical but sustainable, as they resonate with your personal ethos and life plans.

Creating Financial Goals with SMART

1. Specific: Define each goal precisely. For instance, instead of merely aiming to “save more money,” specify “save $5,000 for an emergency fund.”
2. Measurable: Attach specific criteria for measuring progress towards the attainment of each goal. For example, plan to save $416 per month to reach your $5,000 goal within a year.
3. Achievable: Ensure that your goals are realistic and attainable within your current financial constraints and capabilities. In assessing your capabilities to achieve a goal, you should also take into consideration your talents and strengths, as well as weaknesses.
4. Relevant: Your goals should align with your personal values, aspirations and preferred lifestyle.
5. Time-bound: Assign a clear, reasonable deadline to each goal to foster a sense of urgency and help prioritize tasks. For instance, you determine to reach your $5,000 savings goal in 12 months.

How to Prioritize Multiple Financial Goals?

Goals that impact financial health the most i.e. debt, credit ratings, emergency funds, should be prioritized. All other goals may be listed and ranked in the following order:

1. List of Financial Aspirations
2. Achievability is assessed against current income, talents and strengths/weaknesses
3. Sorted against personal values

For example, some of my financial aspirations include setting aside an education fund for my daughter, creating an investment income for retirement, and purchasing a second piece of property. I assess the achievability of these goals against my current income and note that I need to increase my income by X% while controlling my finances.

In order to increase my income, I assess my talents and strengths to tell me which activities I need to work on. This also determines the expected time needed to achieve those goals. Finally, I rank them against my values to find out which are the ones that I truly want to prioritize. There will be some goals that are more “urgent” than others, and some which are ‘nice to have’ but not critical, and thus can be deprioritized. With this information, I set the deadlines of each goal accordingly.

Sample Financial Goals by Deadlines

Short-Term Financial Goals (0-2 years):

Short-term financial goals revolve around immediate needs and are achievable within a year or two. These goals are often the stepping stones toward larger objectives. Here are some examples and strategies to achieve them:

1. Emergency Fund: Aim to build an emergency fund equivalent to 3-6 months of living expenses. Set a specific monthly savings target and automate contributions to this fund.
2. Debt Repayment: Create a plan to pay off high-interest debts, such as credit cards or personal loans. Prioritize debts based on interest rates and pay more than the minimum amount to accelerate repayment.
3. Save for a Specific Purchase: Whether it’s a vacation, a new gadget, or home improvements, set a savings goal and allocate a portion of your income toward achieving it.

Mid-Term Financial Goals (2-5 years):

Mid-term financial goals typically involve larger expenses or milestones that can be achieved within a few years. These goals require consistent saving and planning. Here are some examples and strategies:

1. Save for Education: If you or your children plan to pursue higher education, start saving early. In most countries, there are public programs to help citizens defray the cost of education; most of education programs are heavily subsidized or free. It is important to research well the benefits of such programs and maximise their use to give yourself or your children a head-start.
2. Homeownership: Saving for a down payment on a home is a common mid-term goal. Determine how much you need for a down payment, factor in additional costs like closing/transaction fees, renovation and furniture costs, and relevant taxes, then set a savings target.
3. Investment Portfolio Growth: Aim to diversify and grow your investment portfolio. Consult with a financial advisor to develop a strategy aligned with your risk tolerance and financial goals.

Long-Term Financial Goals (5+ years):

Long-term financial goals focus on building wealth, achieving financial independence, and securing your future. These goals require patience, discipline, and a long-term perspective. Here are examples and strategies:

1. Retirement Savings: Start saving for retirement as early as possible. Most countries have a retirement savings scheme for working adults. For example in the US, citizens can contribute to employer-sponsored retirement plans like 401(k)s or open an Individual Retirement Account (IRA). For Singapore citizens, aim to meet Minimum Retirement Sums in your CPF (Central Provident Fund) and take advantage of liquid investment vehicles like the Singapore bonds and local bank fixed deposit interests.
2. Wealth Accumulation: Invest in assets that can grow over time, such as stocks, real estate, or a small business. Regularly review and adjust your investment strategy based on your financial goals and market conditions.
3. Estate Planning: Create an estate plan that includes a will, trust, and other legal documents to protect your assets and ensure they are distributed according to your wishes.

Additional Tips for Achieving Financial Goals:

1. Track Your Progress: Regularly monitor your finances and track your progress toward each goal. Use budgeting apps or spreadsheets to stay organized.
2. Adjust as Needed: Life circumstances may change, requiring adjustments to your goals. Be flexible and adapt your financial plan accordingly.
3. Seek Professional Advice: Consult with financial advisors or planners to get personalized guidance and ensure you’re on the right track.

Conclusion

Setting and achieving realistic financial goals is a journey that requires dedication, discipline, and strategic planning. Whether it’s short-term, mid-term, or long-term goals, the key is to start early, stay focused, and make consistent progress.

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