Most of you already know that the first step in financial planning is to have financial goals. However, most people create generic financial goals that do not help them much in their financial journey. Your financial goals can be more effective when you use the SMART goal strategy. In this article, we will discuss SMART goals with examples.
SMART stands for Specific, Measurable, Achievable, Realistic, and Timely. Below are details of these terms:
Specific Goals: Every financial goal has to be specific. It will help you understand what you want to achieve. When you have specific goals, you can create a clear route to get there. For example, if your goal is to create a corpus for retirement – the goal is not specific. Instead, your goal should be to start saving Rs 25,000 per month for 21 years (assuming a 12% return) to create a retirement corpus of Rs 3 crore. Of course, if the tenure is too long for you, you can also figure out how much more you need to invest to reach your goal. This can also be achieved faster if you increase your monthly contribution as your income goes up. It will thus motivate you to save incremental amounts to achieve your goal faster.
You should be able to Measure your goal: Create financial goals that you can measure and ideally link to a need. In the example above- Rs 3 cr could be for a particular need like retirement. You should inflate the amount of your need to arrive at this requirement 21 years from now. Another example is for you to clear off your home loan within, say 5 years. When you have a measurable goal, like the above, you have ways to quantify your progress. When you have the numbers with you, you have a clear idea of how you are faring and if you need to make any adjustments along the way. Don’t forget to keep in mind the impact of inflation on your goal.
Your goals should be Achievable: You need to create goals that you can achieve. In the above example, if one would like to save Rs 25,000 for 10 years, it is impossible to achieve the goal of Rs 3 cr in this period. You must set goals that you can achieve. You can invest 25-40% of your salary and see how much you can accumulate based on your risk profile. You can also make your goals achievable by creating a budget. Try and cut discretionary spending and look for ways to increase your income.
Keep your goals realistic: You can always create goals that push you to achieve more. However, you should set goals that are within your reach. If you plan to have a destination wedding in the next 6 to 8 months and need Rs 10,00,000 for it – it is an unrealistic goal you may be setting for yourself. Plan your goals around what you can afford. Alternatively, you can push your wedding – financial goals are about changing the parameters you can change to achieve your goals.
Have a Timeline to complete your goal: In the example, under specific, we mentioned creating a goal of – saving Rs 25,000 to have a retirement corpus of Rs 3 crore and we computed the timeline of 21 years based on the return assumption. Your goal always needs to have a timeline. The retirement example is suitable if you have 21 years to retire. If it is shorter, you need to increase your contributions over the years. You can regularly review your progress every 3-5 years and fine tune your contributions and your investments in order to achieve your goal.
When you set goals, always have a pen and paper and think through all the objectives. Also, not only create SMART goals but divide them into short, medium, and long-term goals. Once you have figured out your goals, you can start investing to achieve those goals. If you have still not done the exercise and think you need some guidance and assistance, you can get in touch with Right Horizons. We have expertise in setting the right financial goals based on your risk profile.
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