How SMART financial goals form the base of a robust financial plan

Just like a building a ‘Financial plan’ too requires strong foundation as that’s going to help you all through your life.

This article has been divided in two parts –

1 – What are SMART goals?

2- Benefits of SMART goals over non-smart goals

Defining SMART goals

Financial goals – future money needs of a family/ individual i.e. what we keep saving money for.

Some of our goals – we need

1. money for buying a house

2. money for buying a car

3. kids’ education and marriage

4. our post-retirement living expenses

Wow, all figured out and sorted!!

So how much should we save to meet these goals???

What different generations say –

Baby boomers would say “SAVE AS MUCH AS YOU CAN” because you never know how much you would need!!

Millennials would say “SPEND REASONABLY TODAY AND SAVE REST” because you never know how much you would need!!

Centennials would say “SPEND TO ENJOY YOUR TODAY AND SAVE REST (IF ANY LEFT)” because you don’t know whether you be alive to use it!!

The FINAL Problem

None of us knows how much is AS MUCH or REASONABLY. If you don’t know how much you would need for what purpose and when – how can you achieve it??

How can we define AS MUCH?

Solution– setting SMART financial goals for our family.

What does SMART mean?

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Specific – the goal needs to be defined in detail. It shouldn’t be a vague wish.VagueDefinedBuy a big car for myselfBuy a Maruti Ertiga (Petrol)Buy a flatDown-payment for a 2bhk in MumbaiSave for future needsSave for retirement (estimate based on current living costs)

Measurable – should be number based. E.g. approximate cost of car you want to buy, estimated future cost of engineering college fees for your kid, etc.

Attainable – should be possible for you to achieve it. E.g. if you earning $5,000/ month is it possible for you to buy a BMW car? Goal should be based on your saving (investing) capacity.

Relevant – should be aligned with your values and priorities. E.g. if you are in a job that doesn’t provide pension after retirement your first priority should be saving living expenses for after retirement time. (Because your kids can still get loan for education, you won’t get loan for food after Retirement!!)

Time-based – should have realistic time frame. Define the number of years the goal would be due in.Goal Time frameBuy a Maruti Ertiga (Petrol)In next 2 yearsDown-payment for a 2bhk in MumbaiIn 5 years from nowSave for retirement (estimate based on current living costs)Retiring in 18 years

For example: you have 7 – year-old kid – what are your financial goals related to her?

1. Graduation – College fees

2. Marriage – big expense

Are they SMART?

NO

Why –

Let’s run them through the SMART framework –

Education –

Of the five SMART parameters Education goal fulfils only two. This means you don’t know what, when and how much money you would need. This will either cause a lot of panic or laxity and you might end up saving too little (spending more today) or too much (living very miserly today).

However, if you make this goal a SMART goal you can be sure how much you should save (invest) today to achieve the goal in future at a specific time of need.

How to make the goal SMART – find answers to all five parameters

Specific – for graduation college fees

Measurable – $33,100 in 2028 (escalating current graduation cost of $24,000 in 2019 @3.6%)

Attainable – need to invest $3,300 per month @4% return (should be attainable in your current income)

Relevant – education being basic need is relevant

Time bound – needed in 12 years.

Summary

SMART goal VS non-smart goal

SMART goals are the foundation of a robust financial plan!

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