Why set financial goals
Personal goal setting is a proven way to help you focus on the things that matter to you while achieving the desired progress and end result. Applying this to your finances should be no different. The financial goals you choose will act as a template for your budget and will dictate both your savings and investments. A well thought out goal can mean the difference between success and failure so putting the time in upfront will pay dividends in the long run.
Recommended Reading: Learn how to create the perfect budget for you with Budgeting For Beginners.
SMART framework
The SMART framework has been utilised across all areas of life. It is an acronym representing the criteria for effective goal setting and stands for: Specific, Measurable, Achievable, Relevant and Time-bound. To have the best possible goal you’ll want to meet all five of these criteria. Lets look closer at what they mean and why they are useful.
Specific
With goals there is no room for being vague. Vagueness only invites excuses. By being as specific as possible at this stage you’ll have clear parameters on what you want your end result to look like. This will make it easier to achieve when you are planning out your journey to get there.
In personal finance the target will usually be saving or generating a specific amount in order to buy something or achieve a certain lifestyle. In order to calculate this number you will need to be specific about what you want. You can then identify its cost or the cost you are willing to pay.
Measurable
By making your goal measurable you’ll be able to track your progress which will give you the motivation to continue progressing. Thankfully in personal finance this is fairly easy as you’ll be tracking your savings and any returns you make on them up until your target amount. You can also set small money milestones throughout your saving timeline to ensure you stay on track towards the final figure.
Achievable
This one is important as it requires real honesty with yourself. With saving for something this will come down to two factors. Your current lifestyle spending and your current income. Both will put a limit on how much you can save towards your goals.
If it is not currently achievable. You may need to reduce the ambition of your goal, have a longer timeframe or work towards a smaller target first acting as a stepping stone towards this goal. Either way, having these honest conversations with yourself are worth it.
Relevant
This aspect of goal setting will be overlooked by many people but is vital for identifying if the goal you have chosen is right for you. In life you may be pressured to pursue the latest and greatest. You may feel the need to buy a bigger house, a more modern car or an expensive watch.
Use this piece of criteria to reflect on if this is a sound financial investment for you. Do you really want it? If its always been your dream to own a Ferrari then honestly go for it! Who am I to tell you no. Its always worth taking the time to think about these things especially when large amounts of money are on the line.
Time-bound
Timing is everything with your goals. It will affect how you measure it and whether its achievable. Setting a realistic timeframe will make or break your goals so ensure you have thought this through.
Creating a SMART goal
The SMART framework is great for checking your goals against but I have found it to be difficult to use when creating a goal from scratch. With this criteria in mind I have created a list of questions to ask in order to create your perfect financial goals. After each question (in italics) I have noted which part of the framework this ticks off.
- What are you trying to accomplish? Be as specific as possible.
- Why do you want to achieve this outcome? Ensure it is relevant to you.
- How much is this going to cost or what is the target figure? Make it measurable.
- When do you want to achieve your goal? Make it time-bound.
- How much per month will you need to raise in order to reach this target on time? Make it measurable.
- Do you currently have the necessary financial resources to afford this? If no, what changes are you willing to make to achieve this? Make it Achievable.
- What other actions need to be taken to achieve this goal on time? Be specific and ensure it is achievable.
Worked example
From using this set of questions I have created multiple goals which I am currently working towards. One of my top priorities is saving up for a house deposit and I am currently building towards this goal. This is what my current house deposit SMART goal looks like this:
1. What are you trying to accomplish? Be as specific as possible.
I wish to buy a three bed house with my partner. It needs to have a moderately sized garden and be in an area with good links to our places of work. The kitchen and living area are most important to us and them being open plan really suits our lifestyle. A separate spare room to act as an office would be ideal. I would also like a driveway and a garage. (Each of these points are more specific in my actual goal).
2. Why do you want to achieve this outcome? Ensure it is relevant to you.
I want to achieve this so that my partner and I will have a place of our own and no longer have to rent. We will have the flexibility to make it our own and have our own outdoor space which we really value. By buying before we are 30 we should also be able to pay off our mortgage before retirement.
3. How much is this going to cost or what is the target figure? Make it measurable.
The price range for this kind of house in the areas we like are between £325,000 and £400,000. For this I will need to save £30,000 minimum to put towards our deposit.
4. When do you want to achieve your goal? Make it time-bound.
This figure needs to be raised in 3 years time.
5. How much per month will you need to raise in order to reach this target on time? Make it measurable.
With my current savings I will need to save £333 a month to achieve this.
6. Do you currently have the necessary financial resources to afford this? If no, what changes are you willing to make to achieve this? Make it Achievable.
I currently have the funds to achieve this. It is tight, however after paying off some debt I will have more capital to put towards this goal.
7. What other actions need to be taken to achieve this goal on time? Be specific and ensure its achievable.
The main thing which will affect may goal target is house prices. We will need to monitor the house prices in the areas we like to assess whether the deposit amount is still achievable for the house we want. (There are many other tasks involved in purchasing a house however these feed into my main goal of purchasing a house in which building up a deposit is one of many SMART goals).
Obviously this is a lot of detail but by being specific it will make the total cost more accurate. It also creates a vision for your goal giving you additional motivation. All this plays into how achievable your goal will be.
Recommended Reading: For more information on the SMART framework read this guide from the University of California.
Taking action
Hopefully now you have the knowledge to set the perfect SMART goal. This is just the beginning as now you actually have to act. The initial goal gives you a basic blueprint of what you want, when you want it and why you want it. You will have also touched on the biggest section of all, HOW you’re going to get there.
For the financial part of your goal, the ‘how’ is taken care of in your budget by allocating funds to go towards your goal. This can further be kept on track by creating a monthly payday ritual. This will ensure you are, at minimum, making a positive contribution to your goals every month. This can also be automated if you so wish.
Recommended Reading: Learn the power of creating your own Payday Ritual.
Preparing for completion
There will also be other actions which are not related to the physical accumulation of funds. Imagine your goal is to get a better car. You may know the model and colour but you will probably still want to book test drives, potentially find a used model or do further research on similar cars. There are still plenty of things to do before you get the keys in your hands.
As the money is being accumulated you can use this time to prepare for the purchase. Set smaller smart goals for each of these tasks including a deadline for completion. This consistent work will pay off as you can eliminate any surprises before the big day when you can complete your goal!
Conclusion
I hope that this introduction to goal planning and utilising my SMART Goal Creation Questions will help you on your way to whatever financial goals you have. If it has helped please let me know in the comments below. Happy goal setting!
Disclaimer
All information is not financial advice and is purely meant for educational purposes only. Investing involves the risk of loss of capital as well as its gain. Any investments mentioned on this website are meant as examples not specific recommendations. Always do your own research and/or gain the help of a financial advisor.
