“Your goals are the road maps that guide you and show you what is possible for your life”
Les Brown
Having goals as part of your financial planning could be the difference between simple saving for rainy days and inspirational life. When you approach your financial planning from the standpoint of what your money can do for you – whether that’s buying a house or helping you retire early – you will make saving more intentional. We all heard of SMART goals (Specific, Measurable, Actionable, Relevant, and Time-bound), but in reality have rarely set up exactly such goals. Financial goals are a good way to train ourselves in the goal setting process.
The purpose of having clear goals
Having goals gives us clarity on what, when and why we should plan as major expenses. We all know that if we start saving a small amount early, it will pile up over time and when you need to use it, it is at your disposal immediately. If you know you will need a big amount of money in the next 5 years, you can start saving immediately and with some planned monthly installments or ad-hoc savings you can have the amount and you can see your progress over time but still balance the life needs and unexpected situations. If you have not started intentionally with this goal early enough, your choices are limited. There are particular events in everybody’s life that can be mapped on a financial plan by creating goals.
Let’s look at an example:
I want to build up a savings account for my daughter’s university education. It is specific, relevant and easily time-bound as I really need it when she is 18, and within the following 2 years. However it is still not measurable and actionable. To make it measurable I need to put a price on the needed savings and build a plan on how to reach it. I can use some of the available university cost calculation tools (e.g. Harvard) to determine the amount. And my next step is to calculate what amount I need to save per month and which investment strategies I will use to make use of the time. If I assume a 100 000 euro amount, and my daughter is just 2 years-old, this means I have to start saving 520 euro per month. If I manage to find a good investment strategy with a return of investment of 5% per year. I will be either ready with the amount earlier – around when she is 14 years old or I can reduce the monthly instalment over the years and add additional goals.
So after I created a specific goal and approximate plan I can start actionable steps to achieve it – for example: set up a monthly instalment saving plan with 520 euro; discuss with financial advisor what kind of investment strategy is good for 14-16 year timeframe and setup such an account in my saving plan; share the goal with my spouse and also think how can we split the savings, and what kind of one time incomes and bonuses we can dedicate towards this common important goal for us. And then just track my progress so once my daughter graduates from school I can without any hustle feel prepared and just enjoy the time she prepares to apply for a university.
How to set a SMART goal?
The approach towards any goal is:
- Define what you want (Specific)
- Quantify the amount of your goal (Measurable)
- Create a plan how to achieve it (Actionable)
- Make it intentional and personal (Relevant)
- Put a date on your dream to make it a goal* (Timebound)
*“The moment you put a DEADLINE on your dream it becomes a GOAL.”
Stephen Kellogg
Now iterate for education, home, vehicles, family, children, own business, dream trips, early retirement, travel around the world, writing a book or any other dream.
Look at them holistically, check the dates, the amounts and the plans and just start.
G row what matters
O ne step
A t a time.
L ittle by little, your
S teps will add up.