When it comes to managing your money, having a solid game plan could help make all the difference between success and failure. This is why it's crucial to have a system in place to reach your goals.
If you're like many Americans, one of your most important financial goals may be to save more money. But do you have a plan in place to reach this goal? Many people have a difficult time outlining the actionable steps they'd take. Fortunately, that's where SMART goal setting comes into play.
What Are SMART Goals?
Setting financial goals that are specific, measurable, achievable, results-focused and time-sensitive (SMART) could help you build a solid financial foundation. The SMART framework may help you set goals that are within your reach — even though the path to achieving them may be challenging. Each letter of the SMART acronym addresses certain pitfalls people tend to encounter when they're setting goals.
Your goals may be too broad or too general, for example. Whether it's merely saying you'd like to make more money or cut back on spending, these goals aren't SMART. So, what does it mean to be SMART in real terms and numbers? It means being precise about what you're trying to accomplish, which is the first step toward actually achieving your goal.
Apply SMART Goals to Your Finances
Imagine your goal is to save more money. How will you do it? If you're relying on SMART goal setting, your plan of action may look something like this:
- Specific: It's time to get specific. Instead of just saying you want to save more money, try a clearer and more specific goal: I want to have $10,000 in savings within the next 18 months.
- Measurable: Find a way to measure your goal. Break your goal down into smaller components. What will it take to save a specific amount of money over the next year and a half? Do the math and determine how much you need to put aside per month. In this case, $10,000 would mean saving about $555 a month.
- Achievable: Pick a goal that's achievable. Can you actually hit your monthly number? What would you have to cut back on to save that much per month? Would you need to pick up extra hours at work, freelance or get a side job? If this seems too big, hairy and adventurous of a goal for you, consider either giving yourself a little more time to achieve it or adjusting the goal itself. This could mean reducing your savings goal to $7,000 or $8,000 instead of $10,000 — or changing your timeline to two years instead of 18 months.
- Results-focused: Focus on the results. While it'll take smaller steps to achieve your larger goal, you should also focus on outcomes. In this situation, the outcome you hope for may be related to building an emergency fund large enough to cover you for several months in the event you lose your job or are unable to work for an extended period. Also related to this part of SMART goal setting is whether your goal is realistic. If you make $30,000 a year, is it possible to save a third of your income without drastically cutting back or hurting your quality of life? If the answer is no, then your goal likely isn't realistic.
- Time-sensitive: Finally, it's important to give yourself a time frame. Whether it's at work or school, we all have deadlines. The same rule applies when it comes to setting financial goals. Placing a specific time limit on when you need to achieve a goal can create a sense of urgency around it, propelling you to work harder. A year and a half may be enough time to build significant savings — but not so far away that you'll lose sight of your goal or abandon it entirely. A time frame of four years, on the other hand, could be too long.
Benefits of SMART Goal Setting
Following these steps and ultimately achieving your goal could help give you more financial flexibility. You can do a lot with $10,000 — whether it's padding your emergency fund, putting the money toward a down payment on a home, investing in an individual retirement account (IRA) or opening a 529 college savings plan for your child's college education.
The bottom line? A solid financial foundation gives you more choices, but you'll likely have trouble getting there unless you set goals. So, if you're trying to get your financial house in order and have a goal in mind, consider whether that goal is specific, measurable, achievable, results-focused and time-sensitive. If you can check off all these boxes, you've already begun setting yourself up for a SMART future.