Setting Financial Goals

1. Defining SMART Goals as the Foundation of a Financial Plan

think about it

Turning your dreams into reality can be achieved by setting goals. Now that you know everyone should have an emergency fund as a goal, what other goals do you have in life? Do you want to own a sports car, buy a home, start a company, be debt-free, take luxury vacations, or have a million dollars at retirement?

Personal financial planning is the process of defining your personal financial goals and setting into action specific plans to achieve those goals.

Goals also change over time in different life stages, as we learned previously. Whatever your goals, having a plan increases the likelihood of achieving them if a goal is a SMART goal: specific, measurable, attainable, realistic, and time based. Having SMART goals makes sure that your goals are realistic, and you can track your progress toward accomplishing them. Let’s look at what makes a goal more achievable by using the SMART goal framework described below:

SPECIFIC: Do your goals clearly describe what you want to achieve and what is required of you to achieve them?

MEASURABLE: What number or metric can you use to check your progress toward your goal?

ATTAINABLE: Can the goal be achieved or is it unrealistic?

REALISTIC: Are you willing and able to do what is needed to achieve your goal?

TIME-BASED: When do you wish to achieve the goal, and are there any short-term goals to be met along the way to reach your long-term goal?

When setting goals, you will likely have short-term, intermediate, and long-term goals. Short-term goals are helpful in making progress toward long-term goals.

• Short-term goals are desires that you plan to achieve within 1 year, such as going on a vacation or saving money for an emergency fund.
• Intermediate goals are to be met in 2–10 years, such as buying a car or a house.
• Long-term goals are plans that you hope to achieve beyond 10 years and are typically related to retiring, funding a child’s education, or buying a second home.

To make financial planning successful and to avoid disappointments, you should be conservative when setting goals to increase the likelihood of achieving them. Being conservative means setting realistic goals you can accomplish with dedication, hard work, and discipline.

EXAMPLE

Setting a goal of making $1 million in the stock market in a year is not realistic. However, saving $100 a month to buy some stocks at the end of a year is a goal that can be achieved if your budget shows that you have a surplus.

As mentioned earlier, one of the most important short-term goals is to put money into an emergency fund. This can give you peace of mind and help you start on a path toward bigger achievements.

To increase the chance of achieving your goals, closely examine your budget and eliminate any unnecessary expenses. Next, determine how much money you could realistically set aside each month and create a plan to achieve your SMART goal(s). You may need to make changes or sacrifices in the short-term to achieve long-term goals, but it will be worth it.

You can also explore ways to increase your income, such as taking on a second, part-time job. You may even wish to consult a career counselor and go back to college to earn an advanced degree to increase your salary and make faster progress toward your long-term goals.

key concept

A safe way to make progress toward saving is to begin putting extra money into a savings or checking account at a bank. If you have set long-term goals to invest in the stock or bond markets, be sure to seek the advice of a financial advisor before you invest. We will explore the different types of savings accounts and how to start investing in an upcoming lesson, but you can begin educating yourself now about the trends in the stock market and the economy by following the business news. Understanding the financial environment allows you to make smarter choices and take a greater part in the decisions that you make with your financial advisor.

Now, let’s examine several SMART goals to determine how to create your own. If a SMART goal is created in a way that is not helpful, you decrease the odds of achieving the goal. Let’s see why we call them SMART goals and what each letter of the word SMART means.

1a. Specific

The first letter of the word SMART starts with an “S” to indicate that a SMART goal should be specific, such as saving money for a particular purpose, purchase, or reduction of debt. Saying you want to save a bunch of cash for a rainy day is not specific enough. The goal should be to achieve something specific that you want to acquire or eliminate. Below are two SMART goals that differ in their levels of specificity.

• Not Specific: I want to pay off my debts.
• Specific: I want to pay off my college tuition loan of $23,000.

The first example does not provide enough information to help us know how much money we need to save and which debt we wish to pay off. The second example clearly tells us the loan is for college tuition and the amount.

1b. Measurable

A goal must be able to be measured so that you can determine your progress toward the goal along the way and if the goal is achieved. Below are two SMART goals that differ in their levels of measurability.

• Not Measurable: I want to save more money.
• Measurable: I want to save $500 per month.

The first example is vague because there is no clear way to track progress, as “more money” does not specify an amount to measure. In the second example, you can track the exact amount saved each month ($500), making it clear whether you’re meeting the goal or not.

1c. Attainable

SMART goals should also be achievable; otherwise, the effort seems hopeless. Setting unrealistic goals only sets you up for failure. Here are two SMART goals, differing by their levels of attainability.

• Not Attainable: I want to earn a salary of at least $150,000 immediately after I graduate college with an undergraduate engineering degree.
• Attainable: I want to earn a salary of at least $50,000 immediately after I graduate college with an engineering degree.

We can clearly see that the average salary of a person graduating college with an engineering degree is not $150,000. On average, it takes roughly 5 years of experience for an engineer to earn that much, according to the U.S. Bureau of Labor Statistics (2024).

1d. Realistic

Like being attainable, the SMART goal must be realistic. The goal must be within an individual’s reach; otherwise, there is no reason to try, which creates a lack of motivation. Below are two SMART goals that differ in their levels of realism.

• Not Realistic: I want to have over $50 million in savings by the time I retire at age 65 in 47 years.
• Realistic: I want to have over $1 million in savings by the time I retire at age 65 in 47 years.

Due to the compounding effect of returns over time, if you save $2,500 per year starting at age 20 for 10 years and then stop saving, with a 10% annual return, your savings will grow to over $1 million by the time you are 65. In contrast, the likelihood of your investments growing to $50 million, winning the lottery, or coming up with a business idea that earns you $50 million is not very high, which makes the first goal unrealistic.

1e. Time Based

Lastly, a SMART goal should have a time or date by which you expect to achieve the result. Otherwise, there is no way to hold yourself accountable or to track your progress. A goal should not be out in the future as something that will happen “someday,” but it should be a dream that you set yourself in action to achieve by a specific time. Below are two SMART goals, differing by their establishment of a time frame.

• Not Time Based: I want to save $2,000 in an emergency fund.
• Time Based: I want to set aside $50 each week over the next 40 weeks (about 9 months) to have $2,000 saved in an emergency fund by the end of 1 year.

As you can see, the second goal clearly states that $50 needs to be saved each week in the short term to achieve the goal. The first goal does not set an end date or short-term goal, so the person who created the goal may not get started right away and may not achieve the goal when they need the money for an emergency.

Raychel
Manager at a grocery store
(Independent life stage, age 32)  

Now that you know the difference between a good and a bad SMART goal, let’s apply the SMART goals framework to our friend Raychel.

Here are two SMART goals that Raychel has listed after thinking about what she would like to do:

Goal 1: Emergency Fund

Raychel would like to build up an emergency fund that has 4 months of living expenses. From her budget, Raychel currently spends $3,821 a month, so this means that 4 months of living expenses is $15,284 (that is, $3,821 × 4). Since Raychel already has $6,400 in liquid assets, she needs to save an additional $8,884 to reach her goal.

Based on Raychel’s comprehensive, multiyear budget from a prior lesson, she expects to have a surplus of approximately $4,000 to $5,000 each year. Therefore, it will take her approximately 2 years if she saves all of her surplus each year into her emergency fund.

Raychel’s SMART Financial Goal: “I will save $8,884 in my emergency fund within 2 years by withdrawing my annual surplus of $4,000 to $5,000 from my checking account to put into savings.”

Is Raychel’s goal:

• Specific? Yes. She aims to build up an emergency fund with 4 months of living expenses within the next 2 years.
• Measurable? Yes. She can monitor the progress over time by checking the balance of her savings.
• Achievable? Yes. She can save her surplus each year.
• Realistic? Yes. Her surplus each year is enough to meet her goal.
• Time-Based? Yes. She wants to meet her goal within 2 years.

try it

Your turn! Determine the answer in the scenario below, and select the “+” icon to reveal the answer when you are finished.

If your goal is to save $10,000 in 18 months, how much of your monthly paycheck of $6,250 do you need to set aside to achieve your goal? You currently have $800 in savings.

Since you already have $800 in savings, you still need to save $9,200 to have $10,000. You will need to save $511.12 each monthly paycheck to achieve your goal in 18 months.

Amount needed each month = $9,200 ÷ 18 = $511.12

After meeting her goal of an emergency fund, Raychel’s next goal is to save enough money for a down payment on a condominium so she can stop renting.

Goal 2: Condominium Payment

Raychel estimates that she will need $20,000 for the down payment. She can save her annual surplus of $4,000 to $5,000, and it will take a little over 4 years once she starts. She would like to purchase her condo within 6 years.

Raychel’s SMART Financial Goal: “I will save $20,000 for the down payment to purchase a condominium within 6 years by saving $4,000 to $5,000 each year after completing my emergency fund goal.”

Is Raychel’s goal:

• Specific? Yes. She wants to save $20,000 for a down payment to purchase a condo.
• Measurable? Yes. She can monitor the progress over time by checking the balance of her savings.
• Achievable? Yes. She can save her surplus each year.
• Realistic? Yes. She should be able to achieve her goal in approximately 4 years once she starts.
• Time-Based? Yes. She wants to meet her goal within 6 years from now.

As we can see, both of Raychel’s SMART goals meet the requirements of being specific, measurable, achievable, realistic, and time based. Remember, Raychel can always adjust her goals based on her progress or if her circumstances change. SMART goals should be customized to your specific life stage, values, goals, and personal income circumstances. It may be a good idea for Raychel to consult with a personal financial planner if she needs help setting more short- and long-term goals that build on each other.

try it

Your turn again. Select the “+” icon to reveal the answer when you are finished.

If your goal is to save $15,000 for the down payment on a car and you have a surplus of $600 each month in your budget, how long will it take for you to reach your goal if you put all of your surplus each month into savings?

If you save $600 each month, then it will take you 25 months, or just over 2 years, to reach $15,000.

$15,000 ÷ $600 = 25 months

Develop Your Own SMART Goal

Use the SMART method to create a financial goal that you would like to achieve. If you are new to financial planning, start with a savings goal or reduce your spending. If you would like to increase your income, set a goal to share your spare time by babysitting, doing yard work for others, or helping care for elders. Think about increasing your income or reducing spending so that you can have a budget surplus that starts you on the path toward achieving your goals. Below is an example that can help you get started. When you are finished, select the “+” icon to reveal the answer when you are finished.

try it

Your SMART goal is to pay off your $3,525 credit card balance within a year. What percentage of your monthly pay of $4,200 do you need to devote toward this goal?

Assuming no interest, you need to commit $293.75 each month to pay off the credit card within 12 months. This is 7% of your monthly pay of $4,200.

$3,525 ÷ 12 = $293.75. $293.75 ÷ $4,200 = 0.07 or 7%

terms to know

SMART Goals

Desires or ambitions described in terms of being specific, measurable, achievable, realistic, and time based.

Short-Term Goals

Goals to be achieved in under 1 year, such as going on a vacation.

Intermediate Goals

Goals to be achieved in 2–10 years, such as buying a car.

Long-Term Goals

Goals to be achieved beyond 10 years, such as funding a retirement account, paying for a child’s education, or buying a second home.

Conservative

A view and/or behavior of an individual who prefers low-risk choices that preserve the current situation and do not alter the value of an asset or wealth.

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2. Pay Yourself First

Finally, if you want to retire early or have lofty, but not unrealistic, long-term goals, you should always “pay yourself first” by investing in your own future. With many people questioning whether Social Security will still be available in the future, only you can be sure to set aside money for your retirement. Plan now for your future to have a stress-free retirement so you can enjoy your hobbies and be rewarded for all your hard work.

Like Raychel, the most important thing you can do now is take the first step in setting aside money regularly into an emergency fund to cover your basic expenses in case you lose your job, you are laid up in the hospital, or your car breaks down. The easiest way to build an emergency fund is to set aside a small amount each month or, better yet, each week. Before you realize it, you will have a small nest egg for emergencies that will ease your worries and maybe extra money to put away in a retirement account for your future.

Setting a goal and developing a plan is the first step to reaching your goals, and personal financial planning can make a significant difference in your life.

REFERENCES

U.S. Bureau of Labor Statistics. (2024, August 29). Architectural and engineering managers. Occupational outlook handbook. www.bls.gov/ooh/management/architectural-and-engineering-managers.htm