It’s a new year and it’s that time again where many of us are thinking of fresh starts, resets, new beginnings, new directions, goal setting and resolution. It could be in the area of your career, relationships, business, finances and fitness.
And the obvious thing we do is set goals and new year resolutions. But how many a times do we find ourselves at the end of year reflecting how far we have missed them?
So how can we help ourselves achieve our goals and resolution? I personally like using the SMART goal method. It’s commonly used in business but I think it’s also applicable for our financial goals and also other personal goals. And it stands for the below:
S = Specific
M= Measurable
A = Achievable
R = Realistic
T = Time bound
So let’s breakdown what each of this means and how you can use this step by step to set a SMART financial goal.
1. Making your goal specific
We generally have a goal in mind but it can be too vague. For example it could be “I want to save more money this year” or “I want to start investing this year”. To help make the goal specific, envision how you see yourself becoming financially and why is it important.
Some examples of these would be “I want to be debt free so I can start having savings ”, “I want to have an emergency fund so I can have peace of mind when a financial hiccup happens” or “I want to be the daughter who can afford to take my parents on a trip each year because I want to spend more time with them”
You will find that your goals will naturally emerge. In the examples above you will know that your goal is to pay off your debt, set an emergency fund and budget for your parent’s trip.
2. Make your goal measurable
The next step after specifying the goal is to make it measurable so that you know what you need to achieve and also define what is success when you achieve it. Hence you would want to put a number behind it.
So let’s use the example above of saving enough for an emergency fund. Experts encourage 3 – 6 months of your expense as your emergency fund. Assuming your one month of expense is at RM5,000 and you prefer to have more buffer. Hence your emergency fund number would be a 6 month equivalent at RM30,000.
3. Create attainable, action oriented goals
Having an attainable goal would require you to review your current position in terms of achieving your goal and how you can put actionable steps towards achieving that goal.
Using the same example above, you might want to look at your current income and expenses review and review whether there’s opportunity to either increase your income or reduce your expenses. You might find that you can reduce your expenses on food or entertainment by RM2,000 monthly by reducing eating out, food deliveries and cutting back on certain entertainment subscriptions. You would want to set a budget on those categories and track it to ensure you do not overspend and make adjustments when needed.
You might also think you can increase your income. However it is worthwhile considering whether that would be within your control. For example, if you expect a salary increase to bump up your income, it would be worthwhile considering whether that it is something that you can action on your own.
4. Assess whether the goal is realistic
What often distracts us from achieving our goal is the feeling of failure and discouragement. This happens when we set ourselves overly ambitious and unrealistic goals and hence failing to achieve it. Having said that, it’s probably not a great idea to set ourselves too easy goals. Hence a good balance would be the best. And we ourselves are the best judge to decide whether our goal is realistic.
Assuming you want to to save RM2,500 monthly for the emergency fund. You have a take home pay of RM4,000 and your fixed commitment is already RM3,000. Would a RM2,500 savings monthly be a realistic goal? Maybe not so much in this case.
But let’s look at the person earning RM6,500 and has a fixed commitment of RM3,500. This means he has RM3,000 for his other expenses. Would a RM2,500 savings be a realistic goal? More likely. He can review his other expenses eg food and entertainment and see how he can commit to spending only RM1,000 monthly. Alternatively, he can look at lowering his fixed commitment. As accommodation is usually the biggest chunk of fixed commitment, options such as renting a cheaper place or having housemates would be option.
Also you would want to test whether the goal is relevant to you. Imagine if you have a credit card debt that is still unpaid, hence saving towards your emergency fund might be a lower priority.
5. Have a time line to the goal
Lastly, it’s important to have a time frame to the goal as this allows you to check in whether you have achieved your goal. What also helps would be breaking the goals into milestones over the longer period.
By tracking milestones over a shorter period, it is much easier to assess how you are tracking and if necessary, adjust. Now if you are looking to save RM30,000 of emergency fund in a year, this would be a savings of RM2,500 a month.
At the end of each month, it helps to review your progress and to adjust when needed. There are times when unexpected expenses crop up that might detour your timeline. You can assess how you can catch up in subsequent months or prolong the timeline. Or you might have an unexpected windfall that can bump up your savings. Then you can consider accelerating your timeline.
The SMART concept can be applied goals short term, medium term or even a longer term goals. It could be paying of a credit debt within half a year, saving towards a certain amount for a house renovation or saving a certain amount for your children’s education by the time they finish high school. Personally this has helped me and examples are when it comes to building my emergency fund, setting up my investments and building towards retirement. Try this out to make your goals a reality. Happy SMART goal setting!