A prerequisite to making progress in your life ambitions is to set goals, and usually at least some of those will be financial goals. Most people, if they decided they needed to lose a few kilo’s, would first weigh themselves to get their starting point, and then set some sort of goal, even if just in their head, like “I’d like to be under 70kg by Christmas”. So you have a measurable outcome that you want to achieve, and you set yourself a timeframe within which you hope to achieve it. This is a process that works, and is used by professional athletes, CEO’s, and school teachers educating our children. Much has been written in recent years about gamification, which is the process of getting people more engaged in something that might otherwise not capture their attention. It adds things like progress scores so you feel rewarded for doing the thing the program wants you to do. This is another form of goal setting.
It makes sense then that if you have financial goals, you should apply a goal setting framework to progress that goal from a dream into a reality.
In developing your financial goals, a popular and successful framework to use is called SMART goals. This acronym stands for:
Let’s take a quick look at how you might use the SMART goals framework to flesh out one of your financial goals.
What if you had a goal that you wanted to own a house near the beach one day. It’s something that perhaps you would retire to later in life, but you’d like it to be a holiday house until then, just somewhere you and your family can escape to.
So the first step in applying the SMART methodology is Specific. Where do you want to have the beach house? How many rooms would it need to have? Your goal might then become, I want to own a house near the beach, in the Angelsea region, that has at least 4 bedrooms and two bathrooms.
The next step is Measurable. Do a little bit of internet research and determine what it’s likely to cost. Let’s say you determine that a suitable property is likely to cost around $500,000.
On to Achievable and Realistic. Given your current financial position, and income, is there a genuine likelihood that you can get to this goal? You may not know the exact path, but you should have a sense of whether it’s likely to be possible.
Then finally Time bound. So that might be, by the time I’m 50.
So your original financial goal was to own a house near the beach one day. But your financial goal, re-expressed as a SMART goal becomes “By the time I’m 50, I want to own a house near the beach in the Anglesea region, which has at least 4 bedrooms and 2 bathrooms, and expect to need to spend around $500,000.”
Your financial goal has gone from a one-day, maybe, proposition, to something that is quantified and really specific. With this nailed down, you can now work on a plan to get you there, whereas before, who would know if you were making progress? There’s a really good chance that with the original goal, you’d never get there, because there would always be other things that popped up and kept your goal, your dream, out of reach.