Plus 3 Examples Of SMART Financial Goal-Setting
It’s always a good time to start thinking about setting SMART financial goals.
So, we will dive into best practices for financial goal-setting today. And discuss exactly how to set financial goals using the SMART process. This is part of our article series on money management topics.
Let’s start with a financial goal definition…
What Are SMART Financial Goals?
First of all, a goal is a desired outcome that a person envisions, plans, and commits to achieve.
Furthermore, a financial goal is an end result that you want to accomplish to improve a specific area of your finances. Of course, goals can be set for your business, job, career, and life. But those areas are not today’s focus.
Finally, what is SMART? SMART is a goal-setting system. And an acronym that stands for:
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The SMART 5-step goal-setting process can be applied to any type of goal. For example, life goals, like finding the right partner and getting married. Or, specific business goals, such as closing 10 new customer accounts during January.
But today, we are going to use the SMART system to discuss financial goal planning. So you can get your finances on the right track.
In other words, what are financial goals? How to set financial goals? And how do those goals fit into your overall financial planning activities?
The 5 Attributes of SMART Financial Goals
We already answered the first question, what are financial goals. So next, let’s review the 5 steps to setting SMART financial goals.
Furthermore, these steps can be applied to any type of goal. Financial, personal development, business goals, etc.
When we set a goal, it must be clear. We do not want it to be vague in any way.
So, the first step in making a SMART financial goal is to make it specific. Ask yourself these questions. Then provide your answer.
- Exactly what is to be accomplished?
- Who needs to be involved?
- Why is it important to achieve the goal?
Here are a few things to consider when answering these questions.
First of all, do not be afraid of being very detailed. The more details about the goal that you can document, the more clear you will be on what you want to achieve. And will know for sure when you have achieved it.
Furthermore, make sure to identify anyone else that needs to participate. Or, be supportive of the process. If there are others involved, you need to make sure they are committed to helping you.
Finally, determine your reason for setting the goal. Not clear on why you want to achieve a goal? Then, it is easy to lose interest in it.
I want to emphasize that being specific about your financial goals is a very important step. The more specific you are. The easier the rest of the steps become to set your SMART financial goals.
But remember this: focus on the result, not the required tasks. These are your personal SMART GOALS. Not a plan for the financial tasks you need to complete.
I used to hear this phrase during my corporate career a lot: “with measurement, comes performance”.
Can’t measure the attainment of your goal in some way? Then how will you know when you have achieved important financial goals?
How will you hold yourself accountable to the goal? Will you know if you are making progress? Because when you can see and measure progress, motivation to push forward will follow.
So, answer this question to make your SMART financial goal measurable: what information are you going to use to measure your progress in route to the goal. And measure whether the goal has been achieved?
Fortunately for us, financial goals tend to be easy to measure. Versus other types of goals. Because we have the almighty dollar as our measuring stick. So, don’t make a mistake by not making your goals measurable.
We want to stretch ourselves. And make challenging financial goals. The types of goals that will improve our finances in big ways.
On the other hand, there is no need to set a goal if it can’t be achieved. So think about this aspect of financial goal-setting when you work on step 1, being specific.
As you specify the goal, it should become clear to you whether it is achievable, or not. Also, consider whether others have achieved the goal you are considering.
A SMART financial goal must be realistic. But how is a realistic goal different than one that is achievable?
I think of this SMART goal step as the concept of being relevant. Does the goal make sense for your current financial situation? And do you have the resources to achieve the goal?
Let’s use an example. Perhaps you would like to set a goal of giving $100 to your favorite charity next month.
That is certainly an achievable goal. After all, many people do just that. And $100 does not seem like an unreasonable amount. Especially for your favorite charity.
But, what if you are currently unemployed, broke, and heavily in debt? Could you borrow money from a friend or family member and achieve the goal? I suppose you could. Borrowing could make the goal achievable.
But the goal is not relevant to your situation. You should have other more immediate goals given the circumstances. It is not a realistic goal, or wise to even consider a goal like this. Even if it is achievable.
So, don’t cause yourself a problem. Set realistic SMART financial goals.
This is a pretty straightforward step in the SMART financial goal-setting process. But, a super important one when it comes to financial goal-setting. You must set a date to achieve your goal.
First of all, having a deadline will increase your sense of urgency. Furthermore, a time constraint will increase your odds for success.
Finally, are multiple steps involved to achieve the goal? Then an end date allows you to work backward. To make sure each intermediate step can be completed to support the timing of the end goal.
Now you know. Not making your financial goals time-bound is a bad decision.
Okay. Now you know the steps in creating SMART financial goals. And the last step in the process required you to set a deadline.
This leads me to the broader concept of time-bound financial goal planning. Time-bound SMART financial goals fall into 1 of 3 categories:
- Short-term financial goals
- Medium-term financial goals
- Long-term financial goals
For well-rounded, smart financial planning, you want to have SMART financial goals in each of these 3 areas. So, let’s define each category for financial planning purposes.
Short-Term SMART Financial Goals
A short-term financial goal is something you want to complete soon. Most noteworthy, I define this as up to 1 year from the date you set the goal. And there are several aspects to short-term goals that we want to understand.
First of all, completing short-term financial goals becomes the foundation for long-term success. Furthermore, achieving short-term financial goals gives us the motivation to keep moving forward. They provide us with “quick-wins”.
Furthermore, it is common for younger adults and a student’s financial goals to focus on the short-term. Why? To set a solid starting point for the future.
Finally, setting short-term goals makes us mindful of our money every day. It’s all about intentional living. Spending money on what you value today. And, living in the moment.
Be sure to focus on short-term financial goals in your 20s and 30s. There is no better time to get started.
After all, today is all we have. Tomorrow isn’t promised. But it must be planned for.
Which leads us to medium-term financial goals…
Medium-Term SMART Financial Goals
Medium-term financial goals allow us to stretch out our thinking. And allow us to plan for important life events in the not too distant future.
What is the time frame for a medium-term SMART financial goal? Well, I consider it to be those goals that we should look to accomplish in more than 1 year, but less than 5 years.
Long-Term SMART Financial Goals
Finally, we have long-term SMART financial goals. These are the goals we want to accomplish in more than 5 years.
We want to think of short, medium, and long term goals as a whole. Why is that?
Because longer-term goals will influence your medium-term and short-term financial goals. I think of this as the ‘big picture” in overall financial goal planning.
I will use an extreme example to illustrate this point. About the relationships involved in financial goal planning…
Example Of How Goals Are Related
Let’s say you are single and expect to remain so.
And your big long-term goal is to live off investment and be financially independent in 7 years at the age of 35. Then travel the world for 5 years.
Well, it wouldn’t make a lot a sense to set a medium-term financial goal of saving and putting a down payment on a house in 5 years. Or set a short-term goal to buy life insurance assuming no one is dependent on your financial support.
You get the idea. We want to pursue goals holistically. Whether it be financial goals, self-development goals, or career goals. Looking at the big picture applies to business goal planning too.
So, each goal should make sense on its own. And make sense in relation to your other SMART financial goals.
Financial Goals Can Change Too
That doesn’t mean your goals won’t change. Not at all. Your financial goals can and will change. Let’s say in our example that in 2 years our friend meets the partner of her dreams.
And she decides to settle down to a nice homestead and have a family. It looks like the long-term goals have changed. Traveling the world is no longer important. Having a family and settling down is.
So saving for a down payment on a house becomes an important SMART medium-term goal. And once that first child arrives. Well, a short-term goal of putting life insurance in place is a must.
I think you get the idea. Make your goals relate well to each other. And don’t worry too much if they change as your life priorities evolve.
But hang on, there’s more. Next up, I want to work through 3 examples of SMART financial goals.
Let’s put what we have learned into action. So you can get going on your smart financial planning and setting your SMART financial goals using these examples as a guide.
For these examples of SMART financial goals, a couple of basic assumptions are necessary. For our make-believe person, a good friend.
She currently makes $50,000 per year. And works in a field with long-term potential. Rents an apartment. And has fixed, non-discretionary living expenses of $47,000.
Short-Term SMART Financial Goal Example
For our first example of a SMART financial goal. We will start with the short-term.
And assume our friend would like to build up a cash emergency fund. To have enough cash on hand to cover any unexpected expenses. Or a temporary job loss.
SMART financial goal: Save $210 during each of the next 12 months to establish a cash emergency fund of $2,500.
Let’s see if it hits all of our SMART financial goal requirements. First of all, is the goal specific?
What? A $2,500 cash emergency fund
Who? Our friend
Why? Prepare for unexpected expenses or job loss
Measurable? Yes. Measured monthly through $210 of savings.
Achievable? Yes. Enough money is left over each month after paying non-discretionary expenses to save $210.
Realistic? Yes. It is both relevant. Because everyone should have an emergency fund. And the resources are available by reducing and reallocating discretionary spending to savings.
Time-sensitive? Yes. To be completed in 1 year.
Next, let’s extend our thinking. With a mid-term financial goal example.
Mid-Term SMART Financial Goal Example
Our friend would like to own a home someday. Both for the emotional satisfaction of homeownership. And to build financial equity in real estate.
So, her goal is to save for a down payment on a home. Buy it. And move to that dream location.
SMART financial goal: Starting in 1 year, save $210 each month for 4 subsequent years to accumulate a $10,000 down payment for a home.
Let’s see if it hits all of our SMART financial goal requirements. First of all is it specific?
What? A $10,000 down payment on a home
Who? Our friend
Why? Emotional satisfaction and to build home equity
Measurable? Yes. Measured monthly through $210 of savings.
Achievable? Yes. Having saved the same monthly amount for the emergency fund. That same cash flow will now be directed to accumulating the down payment.
Realistic? Yes. It is both relevant. Many people choose to own their homes and save for a down payment. Then find a mortgage. And her resources will be available by reallocating savings once the emergency fund has been established.
Time-sensitive? Yes. To be started in 1 year and completed in 5 years.
Finally, our last of 3 examples of smart financial goals. Now, we will think long-term.
Long-Term SMART Financial Goal Example
Our friend would like to increase her earnings by investing in herself and progressing in her career. She knows making more money will bring additional financial security and help her prepare for retirement.
But, she understands that this has to be 1 of her long-term financial goals. Because increasing her earnings will not be easy to accomplish quickly.
SMART financial goal: Increase income in 10 years to $100,000. This requires on average 7% salary increases in each of the next 10 years. Although some years will be more and some will be less.
Let’s see if it hits all of our SMART financial goal requirements. First of all, is it specific?
What? Double earnings in 10 years to $100,000
Who? Our friend with support from boss and employer(s)
Why? Provide for financial security and retirement savings
Measurable? Yes. Measured annually with 7% increases in compensation.
Achievable? Yes. Works in a field with upward mobility. People 10 years senior currently make the amount stated in the SMART financial goal example.
Realistic? Yes. It is both relevant. Being important to invest in oneself and advance in one’s career. And our friend has the resourcefulness and desire to pursue on the job training and new work opportunities.
Time-sensitive? Yes. To be completed in 10 years
That concludes the review of 3 financial smart goals. Can you see how each of the 3 goals individually makes up a bigger picture of well thought out financial goal planning?
Finally, let’s wrap up with a summary.
Financial Goal Setting: Summary
So what have we learned today? First of all, we learned the definition of a goal. And the 5 steps to setting SMART financial goals. The steps to create financial goals are to make them:
- Realistic (relevant & resourced)
We also know our SMART financial goals should fall into 1 of these 3 time-sensitive categories:
- Short-term: up to 1 year
- Mid-term: more than 1 year, but less than 5
- Long-term: more than 5 years.
And we covered 3 examples of SMART financial goal-setting:
- Immediately establishing an emergency fund
- Saving for a down payment on a home during the next several years.
- Doubling earnings and compensation to be achieved in 10 years
That’s all for today. Hopefully, I’ve provided some good ideas for your financial goals. And financial goal setting. Now get going on your personal SMART goals.
After all, it’s your money. And you should plan for it and manage it wisely.
Further Reading About Personal Finance & Money Management
- How we save money using Ebates
- Some of the most affordable states in which to live
- Setting SMART business goals
My Favorite Resources For Achieving Financial Goals
Manage your finances for free with Personal Capital
Build your perfect resume to increase your earnings potential
Make some side cash taking surveys with Survey Junkie
Use Ebates to save on all your online purchases
Save on groceries and much more with the Ibotta app
Use Credit Karma to check your credit score for free
Get affordable hassle-free life insurance from Bestow
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