How to Set SMART Personal Financial Goals for Yourself
Join me on my journey to do personal finance like a pro for a better financial future.
We often set goals for ourselves in life. A goal is nothing but a target, a destination that we want to reach, something that we want or need, which we obtain by following a series of steps. For example, my goal can be to get out of debt or save for retirement or even increase my wealth.
We all have personal desires and aspirations. At a point in time, we want too much but we have too little in our pockets to actually achieve the goal that we wanted to. We end up assigning the blame on various factors for not having enough money. But the actual reason may be that we didn't plan ahead and clearly to be able to achieve the goal. One of the ways that can help us plan our purchases is the SMART goals strategy.
To ace in your financial life, planning ahead for the goal is the ultimate trick to achieve it in the desired time frame.
The moment you put a deadline on your dream, it becomes a goal.
— Stephen Kellogg
What are SMART Goals?
SMART is actually an acronym that stands for
It is a very useful way to define your goals. I will take an example to illustrate the technique to define your goals. Let’s say your goal is to buy a car in life. But rather than just saying that you want a car, you should phrase the goal in a way which is specific, measurable, attainable, relevant and time bound. Thus, this goal can be rephrased as,
Now, this goal is specific because it tells you what exactly you want, it is measurable because you exactly know how much to save so that you have $50,000 after 5 years and you can keep reviewing your progress through those 5 years. You can also assess that it is attainable and relevant, because you may want a car after 5 years to transport your kids, or use it to run errands and the goal is not that outrageously ambitious for you because you can save a little periodically to reach that goal. It is time bound, because it tells you exactly after how much time you need to attain your goal.
This can be applied to any goal, be it short term, medium term or long term. You can then calculate exactly how much you need to save up each month to achieve your goal successfully. In the next steps we will learn how. You can use an excel sheet to do that easily.
Making Goals
The first step to achieving your goals, is to frame your goals into SMART Goals. Follow these steps in order to do so.
First, write down all the goals that come to your mind. They don’t have to be in the SMART format just yet. Some examples are:
- Get out of debt
- Save for emergencies
- Save for retirement
- Save for children’s marriage
- Purchase a house
- Purchase an appliance
- Take a vacation
- Increase wealth
These are some of the goals, of course the list can be endless and would differ from person to person.
Next, segregate these goals, into three categories, namely,
- Short Term Goals (1 year or less)
- Intermediate Goals (2 to 5 years)
- Long Term Goals (5+ years)
Next, frame these goals into SMART Goals,
- Make it specific and measurable, what is it exactly that you want to do. Say you want your wealth to increase, so write down how much should be saved. You should also decide after how much time will you be tracking your progress at regular intervals, say 3 months or 6 months.
- Now, is this goal attainable? Goals are meant to encourage you and not discourage you. Ask yourself, if this is something that you can achieve or not. Say your salary is $5,000, out of that will you be able to save $1,000 per month?
- What is the relevance of this goal? Like I mentioned, see what all purposes will it solve for you once you achieve the goal.
- Assign a time frame, if it is 2020, what is the exact date that you want the goal to be completed on.
Next, write all these in a table where you can see them, either in an excel sheet or a piece of paper. I would recommend an excel sheet.
You can download it from the above link.
Calculating How Much to Save
The next part is to simply calculate how much you need to save for these goals.
What we are essentially doing in this approach is to calculate the future value of the current value of the goal because inflation increases the value of the entity over time. And then we need to calculate the periodic payment amount for the future value of the goal.
Let’s say we want to save $50,000 which we would be needing after 5 years. But the value of the current $50,000 will not be $50,000 but actually $70,000 (hypothetically) after 5 years. So we need to do our calculations on that basis.
Thus, we will be using 2 formulas in excel sheet: FV and PMT.
I will be explaining the process using an example.
The Goal is: Buy a car in 5 years worth $50,000.
In an excel sheet, prepare the following table.
Goal is to buy a car in 5 years or 5 X 12 months or 60 months | |
---|---|
Car price today (USD) | $ 50,000.00 |
Inflation p.a. | 4% |
Time (months) | 60 |
Expected Rate of Interest p.a. | 8% |
Here we need 4 variables:
- The current price of the car
- Inflation p.a., you can find out what is the average rate of inflation in your country
- Time in Months
- Expected Rate of Interest that you get on your investments. I have taken an average of 8%, but you can adjust that according to the rate of interest that you earn on your investments.
Next, we will calculate the future value of the current price $50,000.
For that we will use the formula below in Microsoft Excel.
- SMART GOALS CALCULATOR
Use this Excel Sheet to follow along the steps.
Note: The inflation is in per annum terms, we need to convert it to per month rate. So do not forget to divide by 12. In this example, the future value will be
=FV(4%/12,60,,50000)
= $ 61049.83
Variable | Value |
---|---|
Car price today (USD) | 50000 |
Inflation p.a. | 4% |
Time (months) | 60 |
FV (USD) | 61,049.83 |
Now, we need to calculate the amount required to save per month. For that, we will use the formula described below, PMT.
The interest rate is also in per annum terms, we need to convert it to per month rate. So do not forget to divide by 12. In this example,
=PMT(8%/12,60,,-61,049.83)
=$830.87
Variable | Value |
---|---|
Car price today (USD) | $50,000.0 |
Inflation p.a. | 4% |
Time (months) | 60 |
FV (USD) | -$61,049.83 |
Expected Rate of Interest p.a. | 8% |
Monthly Saving for the Goal (PMT) | $830.87 |
Thus, one needs to save $830.87 per month to be able to save enough for the car 5 years later.
And just like that you can calculate how much to save per month to achieve your financial goals.
Save Away
This method can be applied to all goals, and these steps can be used for any kind of saving that you want to do. I find this is a really effective way of learning how much you need to save to achieve your goal. Once you see that, it becomes easier to save because you know exactly how much you need.
Happy Saving, and hope you get to achieve your goals.
© 2020 PGupta0919