Goal setting is a very important thing for a successful personal and professional life. Moving on in life without any clear direction and living the day with by just instinct is not going to help us in getting what we want in life. The importance of goal setting can not only be justified by the sheer amount literary work done on the topic but also by the results it produce. Likewise, Financial Goal Setting is even more important. In this blog, we explain the SMART Financial Goal Setting method in detail.
I would like to share some of my favorite books on the goal setting which helped to understand the nuances of goal setting methods and implementation of the same strategies in personal finance management.
Smart Goal Setting:
Goal setting is one of the way to achieve what we want in life by specifically defining the thing along with estimated time, effort, tools and help required. The SMART strategy is a widely used goal setting approach which gives a detailed picture of our goals and also help to lay plans to achieve it.
|S||Specific,simple,Significant||Start with simple,significant and specific set of goals.|
|M||Measurable,meaningful,motivating||Have track record to measure the happenings in achieving the goals.Meaningful and motivation comes along with proper measuring of steps and results.|
|A||Attainable,Applicable,Agreed||Should be aware of and agreed upon the attainablity of the goals|
|R||Realistic,result based||Being realistic and practical about the result to be obtained.|
|T||Timebound,timebased||Each of the goals should be timebound and timebased.Can’t run with a goal forever.|
SMART Financial Goal Setting:
Financial goals are no different to our life goals. So applying SMART technique in setting financial goals is much similar to setting life and relationship goals. Now let us get into SMART mode in finance with an example .Of course Mr.K is always ready to help us to understand the SMART mode. Mr K ,a banker by profession earns 6lakhs/annum or say 50k/month and following table illustrates his earnings and deductions.
|Earnings (Monthly)||Amount in Rupees||Deductions(Monthly)||Amount in Rupees|
|Basic Salary||30000||Personal Loan||4500|
|Living Expenses (Stationary and Vegetables)||10000|
|Gross Income||55000||Total Deduction||50500|
The Net Income in Hand = (Gross income – Total deduction )
The Net Income in Hand = 55000-50500
= Rs. 4,500/-
Now Mr.K has an amount of 4.5k in hand after all loan repayments, rent, living expenses and other deductions. Mr.K wants to pay off all his debt fast, save for his family, invest in stock market and have all worldly possessions, but Mr K is very much confused how to set his goals and also doesn’t understand how SMART goal setting works. Let me help Mr.K how the SMART goal setting works with the following table.
An Illustration of SMART Goals:
|1.||PayOff all debts||Pay all minimum monthly dues and then pay extra amount to lowest loan (personal loan).Using Debt snowball method,close the lowest loan faster and move on next lowest loan.|
|2.||Save more||Save 2000 every month.(Recurring deposit)|
|3.||Save for vacation||Save 1000 every month for vacation|
|4.||Reduce expenses||Reduce eating out to nilreduce consumption of meats to once a week3 or 4 pairs of dress per yearlearn lifehacks to reuse and remodel old clothes &ornamentsAvoid chunk foods|
The difference between the goals and SMART goals is that goals are broad and vague whereas SMART goals are specific, measurable, attainable, realistic and time bound. Take the above example of paying off all debts. It is broad, vague, no time limits ,no measuring stick and simply plain statement with no deep commitments. Whereas SMART goals defines a set of actions to follow within certain time period.
Lets say Mr.K pays minimum monthly dues or loan payments for all loans except the least loan amount(personal loan).For personal loan, he pays extra 1000 from his net income of 4500.The additional payment helps Mr.K to close the personal loan in a fast phase and then he can move on next least loan amount(car loan).This method is called Debt Snowball method which we have discussed elaborately in previous articles.
Financial goals should always take account our current financial conditions and future commitments. There should always be fund allocated to emergency and unexpected ones. It will be harder to incorporate too many goals into life at a point of time. It is always better to have a SMART goal planning with short term and long term commitments.
The short term and long term goals may vary person to person, but it is always better to put a time limit to every goal we set along with specific set of instructions to be followed which are realistic and attainable. We also have to improvise time to time with the need arising at that particular moments.
Our best advice would be to set SMART Financial Goal which are specific, measurable, attainable, realistic and timebound but don’t get fixated or obsessed with goals leaving no space for improvisation or adjustments. After setting SMART goals, act on the goals by taking apart it into smaller chunks of actions.
“Wishing and praying is good but working is better”-Aarth.
Let us now look at some Time Bound SMART Financial Goals!
Short term financial goals: (a year or less)
- Paying off debts which are less amount and can be closed within a year
- Build a small workshop for my projects.
- Building an emergency fund for 1year.
- Saving for a vacation of 15days.
- Starting a business.
- Buy latest gadgets and software for my projects.
- Join a course (online or offline) to build your finance .
Long term goals:(five or more )
- Saving for retirement.
- Buying a home.
- Paying off housing loan
- Become debt free.
- Investing in stocks and shares
Some of the Books that can help you to set SMART Goals.
- Your Best Ever Year by Michael Hyatt.
- Creating Your Best Life by Caroline Miller
- 9 Things Successful People do differently
- The Slight Edge by Jeff Olso
- Goals! By Brian Tracy.
- Essentialism by Greg Mckeown
- The One Thing by Gary W. Keller and Jay Papasan.