Tag Archives: Goals

How to Make Realistic Personal Finance Goals

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According to Kiplinger, every person needs a steady income, financial reserves, and insurance against catastrophes, whether that’s formal insurance or a large savings or investment account. Whether you already have those things and you want to work toward a more rewarding financial future, or you’re nervous that you don’t have one or all of those things, you’ll need to set financial goals to get where you want to be.

Regardless of your current life stage, your financial goals will be dictated by your life goals. Whether you want to retire early, send your children to college, or travel more, you will need to manage your money well in order to plan for your future. In addition to developing a solid emergency fund, you may plan to have a wedding or purchase a house soon. Automatically depositing a chunk of your paycheck every week or month is one way to pay yourself first and plan for these goals.

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Setting aside money for specific goals is a good idea, but how do you decide how much to set aside, and how often? That depends on your long-term, medium-term, and short-term goals. Long-term goals may be that elusive retirement, while medium-term might be making a large purchase like a vehicle or a house, and a short-term goal might be paying off that pesky credit card. To meet those goals, you need to make them even more detailed and specific.

Applying the SMART method to your financial goals is one way to get a clearer idea of what you really need to do to make your money matters work for you. “SMART” stands for Specific, Measurable, Achievable, Realistic, and Time-Limited.

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The “specific” characteristic directly addresses the thing you want your money to pay for: the house, the college degree, or the new car. It is important to make your goal specific because then it will have meaning. “Measurable” means applying a specific amount to that goal, such as $18,000 for the car or $30,000 for the down payment for your house. Find out how much you will need to reach that goal and apply that amount to your goal.

To figure out whether a goal is “achievable” is a big challenge, and sometimes very closely linked to the “T” in SMART. A financial goal is only achievable if you give yourself enough time to do it. If you want to buy your own island in the tropics, but you only have $10,000 in your savings account, you may need to make it a long-term goal for it to be achievable. If you just want to buy some property that doesn’t necessarily need to be adorned with palm trees, you may be able to make it a medium-term goal with a starting point of $10,000.

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But we skipped the “R!” Well, that’s because you have to know if your goal is achievable and time-limited to know if it is realistic, and that might be the most challenging element of all. For a goal to be time-limited, you simply need to give it a deadline, but how can you tell if that time limit is realistic? Setting unrealistic goals is the best way to shoot yourself in the foot when it comes to financial planning, because you can spend so much time focusing on the dream that you don’t actually see the way your money is really being spent.

Whether or not your goals are realistic depends on how well you prioritize. For example, if you want to buy a house in the next year but pay $600 in rent and $600 in student loan payments while making $2,000 per month, you’ll need to consider where you spend the remaining $800 each month. Does it leave enough to save for the down payment you’ll have to make? Furthermore, do you have good enough credit to get a homeowner’s loan? If you spend all but $50 of the remaining $800 on groceries, a car payment, a credit card balance, medical bills, and utilities and have only decent credit, you may want to re-adjust the time limit on your goal and add another goal to the mix: increasing your credit score.

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Without setting financial goals, you will not be able to pay for the things you want. Without setting realistic goals, you won’t have a clear idea of how to approach the future. So SMARTen up and start setting goals today!

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