If you are like most people, chances are, you have set personal finance goals, and probably gave up on it. Here’s a S.M.A.R.T framework to set personal financial goals that you can actually see through to completion.
Step 1 - Make Specific Goals
Most of us would set goals like
- I want to be debt-free
- I want to buy a car
- I want to retire early
Here’s how we should be setting our goals instead
- By December 2015, I should pay off 80% of my debt and the remaining 20% within the next 3 months
- I want to buy a Sedan costing 8 lakhs by 2017 by investing Rs 30,000 every month in debt mutual funds
- I need 10 crores by the time I retire in the next 30 years. I need to save Rs 20,000 every month for the next 30 years in equity mutual funds
Set very specific goals after identifying your priorities. This will help you focus on goals that are the most significant. It is a good idea to write down your goals in order to make them more definite.
Step 2 - Make Them Measurable
What’s not measured cannot be improved.
You need to have measurable goals to know how your goals are progressing. You should be able to measure the ‘when, how long, and how much’ of every financial goal.
Questions You Need to Answer
#1: When – You need to know when each of your goals should be attained.
- When do you plan to take that exotic family vacation?
- When do you plan to pay off your debts like credit card payments, loans, etc.?
- When do you plan to retire?
Pro Tip – The best time to invest is whenever you have surplus money, instead of trying to time the market.
#2: How Long – You need to know how long it will take you to achieve your financial goal.
Use simple SIP calculators like these to understand how long you need to save to reach your goal.
#3: How Much – You need to know how much amount you need to accomplish your goal.
- How much money would I require on retirement to lead the same lifestyle as of today?
- How much money do I need to invest to make the down payment for a new house?
- How much extra money should I pay each month to pre-close my home loan?
Pro Tip – If you want to accumulate wealth as part of your goal and have a sufficiently long time frame for achieving your goals, then invest in assets that give you inflation-beating returns like company shares or equity mutual funds. You’ll be able to reach your goals faster or with lower amount of money per month.
Step 3 - Make Them Accountable
Set goals that you are held accountable for. Ensure that failure to reach goal milestones will get you penalized and there is someone to point it out to you.
Step 4 - Make Them Realistic
You need to have realistic objectives to set achievable financial goals.
Questions You Need to Answer
- How ‘do-able’ are the goals you have set?
- Do you have a plan on how you wish to reach your target?
Pro Tip – The most common mistake people make when it comes to finances is calculating how much amount they need when they retire. Be realistic and take into account after-retirement expenses, inflation, and other non-essential needs like vacation while planning for your retirement corpus.
Step 5 - Make Them Time Bound
Create a sense of urgency with a deadline for each goal.
When you make a time-bound goal, you have better clarity into what it takes to achieve that goal. A retirement that’s only 5 years away vs 30 years will need very different approaches.
Pro Tip – You may not be able to achieve all your goals at the same time. You may want to clear your debts, get a car, buy a house before you turn 30, or start saving for an early retirement.
Based on the deadline you have defined, take one step at a time to achieve financial goals.
The best way to set achievable financial goals is by making them specific, measurable, accountable, realistic, and time-bound.