Setting financial goals - the SMART principle

The notion of using the SMART principle as a general guide for setting financial goals has been around for years. Each letter represents a keyword that separates good financial goals from bad ones:

S - specificity. Setting a good financial goal means being very specific about what you want, not generally. If you want to move somewhere to your retirement: exactly where and under what circumstances? If you want to send your child to college: what type of college, how long and what expenses are you willing to cover? It is important to set specific financial goals in order to realistically plan to achieve these goals.

M - Measurability. Correctly setting financial goals means setting a goal that you can actively measure. This is linked to specificity but also means that it is something that you can routinely go back to to ensure that your original goals are still fit to reach the goal in the desired timeframe. Being able to accurately measure your goals is important to creating a viable plan to achieve them.

A - Achievement. When setting financial goals, it is important to set goals that are realistic and achievable. Achievement is relative, what can be a realistic goal for a multimillionaire is probably not realistic for a shop worker who makes minimum wage. Both of these people can - and should - set financial goals, but what each one can achieve is radically different based on their circumstances.

R - Reward. Your financial goals should reflect things that you sincerely want, that is, a good financial goal should be its own reward. The time and resources used to achieve serious long-term goals requires that you really want them. If you do not, it will be nearly impossible to maintain the discipline required to actually achieve them. Reaching your financial goal should be its own reward.

T - traceability. You need to be able to effectively track the path to achieving a good financial goal. In addition to simply measuring what is required, you must be able to track a course of action that steadily moves you closer to success. Tracking your path to success and re-evaluating this path regularly will ensure that you are still on target. Or if not, it will at least highlight that it is time to take corrective action.

The SMART principle described above is a beautiful little associate that can help set financial goals. Any financial target model that does not meet these requirements is probably a bad idea and should be reconsidered.