A crucial first step in ways to set SMART financial goals and achieve financial security is setting short-, mid-, and long-term financial goals. You will probably spend more than you should if you have no precise goals. When you need money for unforeseen expenses or when you want to retire, you won’t have enough.
You may become mired in a never-ending cycle of credit card debt and feel as though you never have enough money for adequate insurance, making you more exposed than necessary to manage some of the biggest risks in life.
As the world discovered during the epidemic and many families learn each month, even the most careful individual cannot be ready for every disaster. Thinking ahead allows you to consider potential outcomes and make every effort to be ready for them. In order to adapt your life and objectives to the inevitable changes that will occur, this should be a continuous process.
Tips For Setting SMART Financial Goals
1. Create A Budget
Until you truly know where you are at this moment, you cannot know where you are heading. One of the ways to set SMART financial goals is by creating a budget. The amount of money that falls between the gaps every month may surprise you. Using free budgeting software is a simple method to keep tabs on your spending. It will compile data from all of your accounts into a single location, allowing you to categorize each expense.
By reviewing your bank accounts and recent bills, you can also make a budget the old-fashioned way by classifying each cost on paper or in a spreadsheet. You can make better judgments about where you want your money to go in the future once you can see how you are spending it and use that information as guidance.
Do you think eating out is fun and convenient enough to justify the monthly extra cost? If you can afford it, that’s fantastic. Otherwise, you’ve just found a simple method to save money each month. When dining out, you can find ways to cut costs, substitute homemade meals for some takeaway or restaurant meals, or do both.
2. Build An Emergency Fund
The money you set aside expressly to cover unforeseen costs is known as an emergency fund. $500 to $1,000 is a reasonable starting point. Once you reach that target, you should increase it to enable your emergency fund to cover more significant financial challenges, including unemployment. It’s conceivable that you wish you had an emergency fund before the COVID-19 pandemic.
Additionally, if you have one, you might have used it up and need to top it out. You should save enough money to cover your basic needs and financial obligations for at least three months, but ideally six months.
This is especially important if you are married and work for the same company as your spouse or if you live in an area with few job opportunities. You may finance your emergency reserves by identifying at least one area of your budget where you can make cuts.
Organizing and decluttering is another method to increase emergency funds. Holding a yard sale or selling unwanted items on Craigslist or eBay can provide additional revenue. Think about converting a pastime into a part-time job so you can save money.
3. Define Your Goals
To ensure you know how to set SMART financial goals, make your financial goals specific. Planning a route to reach your goal will be simpler if it is more clearly defined. For instance, you may begin with the broad idea that you wish to increase your savings or begin making investments for your retirement.
These are excellent places to start, but without a specific aim, it’s hard to achieve. From each paycheck, how much do you wish to save? What is your desired retirement investment amount?
Make your objectives more precise by giving them more details, such as “I want to automatically invest a portion of each paycheck into my 401(k) to save for retirement” or “I want to automatically transfer a portion of each paycheck into a high-yield savings account.”
Setting clear financial objectives will help you know exactly what you want to achieve, how to know you’re on track, how to go about achieving it, and when you intend to reach your goal. In summary, well-defined financial objectives are easier to attain, more motivating, and more transparent.
4. Credit Card Repayment
Regarding whether to establish an emergency fund or settle credit card debt first, experts cannot agree. Even if you have credit card debt, some people advise you to set up an emergency fund since, in the absence of one, each unforeseen cost would push you deeper into debt.
Some argue that because credit card interest is so expensive, it is best to pay it off first since it will make it harder to reach any other financial objectives. Choose whatever philosophy makes the most sense to you, or combine the two.
List all of your credit card obligations in order of lowest to highest interest rate, then pay the minimum amount due on all except your highest-rate loan as a method of paying it off. Make extra payments on your highest-rate card with whatever extra money you have.
The debt avalanche is the name of the technique. The debt snowball is another strategy to think about. Regardless of the interest rate, you use the snowball approach to pay off your obligations in order of smallest to biggest. Paying off the smallest obligation will give you a feeling of success, which will motivate you to take on the next smallest bill, and so on until you have no more debt.
5. Measure Your Progress
As ways to set SMART financial goals, make your financial objective quantifiable by figuring out how to measure your success. By specifying how much and how often you will save, you may make your objective quantifiable when it comes to saving, such as for an emergency fund: I’ll automatically deposit $50 from each monthly paycheck into a high-yield savings account.
In this manner, you will be able to determine if you are on track and what you need to do to reach your objective. Establish your contribution level to make your retirement objective of contributing a portion of your income to a Roth IRA measurable: “I’ll defer 15% of each paycheck into a Roth IRA.”
You may make your goal quantifiable if you want to pay off all of your credit card debt by adding up your balances to see how much you owe and then determining how much you will contribute to the bill each pay period.
6. Have Achievable And Realistic Goals
Determine the specific actions you’ll need to take to meet your financial goal in order to make it attainable. For instance, setting up automatic payments is one of the finest strategies to make your retirement investment goal attainable. Putting money into your retirement account and paying yourself first will prevent you from being tempted to spend it elsewhere.
Additionally, by making sure you can survive on the money left over after your contributions are deducted from your paycheck, you may make your investment objective attainable. Make a budget and start by keeping track of your expenses.
7. Have Life Insurance and Disability Income Insurance
Are your husband and kids dependent on your income? If so, life insurance is necessary to cover them in the event of your untimely death. The majority of people’s insurance requirements may be satisfied by term life insurance, which is the most straightforward and affordable kind of life insurance. You may get the greatest deal on coverage with the assistance of an insurance broker.
Unless you are sick, you should be able to locate at least one company that will sell you a policy. The majority of term life insurance involves medical underwriting. Disability insurance should be in place to safeguard your earnings while you are employed. This coverage is offered by most workplaces.
If a major illness or injury prevents you from working, disability insurance will replace a part of your income. If you lose your capacity to produce an income, it may provide a higher benefit than Social Security disability income, enabling you (and your family, if you have one) to live more comfortably than you otherwise would.
Another reason why having an emergency fund is crucial is that there will be a waiting time between when you become incapacitated and when your insurance benefits begin to be paid out.
8. Clear Student Loans
A significant burden on many people who want to know how to set SMART financial goals is student debt. Reducing or eliminating such payments will free up funds that can help you reach your other objectives and save for retirement.
Refinancing into a new loan with a reduced interest rate is one tactic that might assist you in repaying your student loans. But take caution: You can forfeit some of the advantages of federal student loans, such as income-based payments, deferral, and forbearance, if you refinance with a private lender.
These perks can be helpful in times of need. The aforementioned debt avalanche or debt snowball strategies may assist you in paying off your student loans more quickly if you have many and won’t profit from refinancing or combining them.
9. Give Yourself A Deadline
Deadlines are necessary for most objectives. For this reason, when you make financial objectives, you should use a timeframe. For instance, you may set deadlines for each of your smaller objectives, such as saving $1 million by retirement. By the end of this year, for instance, you may want to have $7,000 saved for retirement.
Alternatively, you may concentrate on the shorter-term objective of saving three times your income by the age of 40 to split up your retirement goal. Setting targets for when you’ll have paid off a certain percentage of your high-interest debt will help you keep on track and develop a practical strategy.
For example, if you have $20,000 in credit card debt, you may want to prioritize paying it off as soon as possible. You may set a timetable for when you’ll be debt-free, like two or three years, to create a SMART debt payback strategy. If you have less debt, you might try to pay it off in a year.
To make debt repayment more effective if your credit score is high, think about combining smart credit product methods with SMART goal-setting. You may save a lot of money on interest by moving your debt to a card that offers a long 0% introductory APR term.
It also gives you a deadline. You must make monthly payments to pay off your debt in full before the conclusion of the promotional term if your introductory APR period is 18 months. A personal loan, which has a set duration and monthly payments that function as built-in timetables, might help you achieve the same goal.
Wrapping Up
In the quest to find ways to set SMART financial goals, it’s likely that you won’t achieve all of your objectives in a flawless, linear fashion, but consistency is key. Don’t be hard on yourself if you have to withdraw money from your emergency fund because of an unforeseen auto repair or medical expense one month; that’s why the fund exists. Simply get back on course as quickly as possible.
The same is true if you get ill or lose your work. You may not be able to save for retirement or pay off debt during that challenging time, so you’ll need to come up with a new strategy to get through it. However, after you’re over it, you may restart your original plan or maybe a modified one.
Throughout life’s ups and downs, you may evaluate and revise your objectives and track your progress toward achieving them. This is the beauty of yearly financial planning. In the process, you will discover that your financial objectives may be met by the little things you do every day and every month, as well as the larger things you do annually and over the decades.
FAQ
Q: How does one go about creating SMART financial goals?
A: To establish SMART financial objectives: Tell us exactly what you want to accomplish. Set specific goals, such as growing savings, reducing debt, establishing an emergency fund, or investing in a company. Decide how much you need to pay off a debt or how much you want to save.
Q: What is a quantifiable financial objective?
A: A measurable goal outlines how you will determine if you are on track or have met your objective. It responds to the query: How many or how much? A quantifiable objective makes it easier to track your progress and recognize your accomplishments.
Q: Why would someone make financial goals?
A: Setting financial objectives may assist you in determining how best to spend and conserve money in both your personal and professional life. These goals may help you prepare for a secure retirement, lower your debt, and enhance your lifestyle over time.
