How to Set SMART Financial Goals

An important factor in achieving financial success is setting good goals that you can work toward. Like traveling, you can get to where you want quicker if you know where you are going instead of wandering about aimlessly. However, you can’t just say that your goal is to retire rich someday. For a goal to be effective, it has to be SMART — i.e., Specific, Measurable, Actionable, Realistic, and Timely.

For example, one of the financial goals I set for myself back in 2007 was to have a $1 million investment portfolio by 2017 — scroll down to see the result!

Making Your Financial Goals SMART

What are SMART goals exactly? SMART is an acronym to help you create high-quality goals so that you have a higher chance of achieving them.

• Specific – A goal should be specific enough so that you can measure and track your progress, and be accountable. For example, instead of saying you want to be “rich,” you can state that you want to have $1 million in 10 years.
• Measurable – A goal should have defined measurement. For example, “rich” is not a measurable goal, but “$1 million” is.
• Actionable – A goal should be attainable or actionable. This means that you can take practical steps toward achieving your goal — i.e., figure out how to make it comes true. For example, to have $1 million, you’ll have to reduce your expenses, save money, invest, and let compounding works for you over time.
• Realistic – A goal has to be within the realm of possibility. In general, it’s better to take ten smaller steps than one huge leap. For example, $1 million might not be realistic, and you might consider saving $10,000 first. Once you reach $10,000, you can up the ante to $50,000, etc.
• Timely – A goal should be bounded by a time limit. For example, saving $1 million without time frame attached to it is not a good goal, but saving $1 million in 10 years is grounded with a time frame and is a better goal.

Here are a few more articles on financial goal setting:

• How to Set SMART Financial Goals at the Dough Roller
• Setting Financial Planning Goals at ABC of Investing
• How to Get Your Finances Under Control – Step 2: Set Financial Goals at Gather Little By Little
• 12 Steps to Setting a Financial Goal at The Wisdom Journal

A SMART Goal Example: $1 Million by 2017

Before I started this blog in 2007, I did not have good financial goals — I just wanted to be rich. But what is rich?

In Are You Wealthy? U.S. Net Worth by Age and Income, I defined wealthy as

when income from my assets can cover all my family living expenses and a few luxuries.

That was a good start, but now I want to put together a SMART plan.

Goal: Build a $1 million investment portfolio by 2017 (excluding home equity)

• Specific – I know exactly what I want – i.e., $1 million investment portfolio
• Measurable – I can track progress – i.e., I can check my portfolio balance at any time and see how I am doing
• Actionable – I know the steps needed to achieve the goal – i.e., by saving $20,000 per year and investing that money
• Realistic – My goal is in the realm of possibility – i.e., investing for a 10% annualized return is possible.
• Timely – I know when I want to achieve my goal — i.e., 2017

Since I already had $230,000 when I started this goal, I felt it was achievable. I planned to add about $20,000 a year to the portfolio and grow it by about 10% a year.

Here is what the spreadsheet looks like:

In case you’re curious, we (my wife and I) did finally accomplish this goal but not by 2017. Seriously, the financial crisis of 2008 was no joke, and that did put a dent in the original plan.

Prioritize and Act On Your Goals

After you set your goals, the next step is to prioritize them.

Although it’s nice to be able to accomplish them all, sometimes that is not possible. You may have to make some changes and accept some compromises. This is when understanding the wants vs. needs, and the order of importance for your finances becomes critical.

Here is an example of how you might prioritize things:

1. Essential Needs – This always comes in the first place since you cannot survive without food and shelter. The good news is that most families are living beyond the basic essential needs, and there is usually room to cut some expenses here to help you meet other financial goals.
2. Paying Down Debt – Since most of us have some debt, it is generally the second-highest priority goal. However, not all debts are bad. As a general rule of thumb, it is a good idea to pay down or refinance any debt above 6.5% — and you’re generally better off investing if you can earn more than 1.4 times the interest on your debt (see 1.4x Investing vs. Debt Pay Down Rule).
3. Saving for Retirement – This should be the next major goal for most people, and a good number to shoot for is saving 15% of your income toward retirement. Here is how I would prioritize the investing order:
   • 401(k) Match – If you have a 401(k) plan and your company is matching, always take 100% of the match first. This is even more important than paying down debt! (so this is like priority 1.5)
   • Roth IRA – Next your money should go toward Roth IRA, up to the $6,000 maximum per year. For most people, money growing tax-free in Roth is more critical than getting the current year tax deduction.
   • Max out 401(k) – Next, you’d want to max out your 401(k) if you can do so.
4. Saving for a House – I think a house is an excellent long-term investment and you should try to own one. Some times, you even get the added benefit of saving money because it happens to be cheaper to own than rent. If you’re able to save 15% toward retirement, the extra money you can save should go toward saving for your down payment.
5. Other Financial Goals and Wants – After the ones above, you want to prioritize to achieve other financial goals and things that you want to buy or do.

After you prioritize your goals, the next step is to review them and identify the actions you should take to accomplish each goal.

Please feel free to share your SMART financial goals below.

Pinyo Bhulipongsanon

Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.