Make Your Financial Goals SMART and Your Savings Systematic

Dr. Barbara O’Neill

By Dr. Barbara O’Neill, Financial Management Specialist, Rutgers Cooperative Extension, boneill@njaes.rutgers.edu

There are several important reasons to save money, including peace of mind and to have cash available for emergencies. Another motivating factor is to have money to achieve financial goals (e.g., buying a new car).

Setting financial goals is a lot like planning your next vacation. In order to develop goals and a travel itinerary, you need to know your starting point (Point A), destination (Point B), and the time frame and cost of the “journey.”

What is your financial itinerary? Have you made specific travel plans?

Start by making your financial goals “SMART” goals. SMART is an acronym for Specific, Measurable, Attainable, Realistic, and Time-related. In other words, financial goals should have a definite outcome and deadline and be within reach, based on your personal income and assets.

Write a SMART goal using this format: “I will [describe outcome] by [date].”

Example: “I plan to save $15,000 for a car in 5 years.”

The more specific a financial goal, the easier it is to determine how much savings is required. You simply work backwards to break a large goal into smaller pieces.

Example: $15,000 in 5 years will require $3,000 in annual savings or about $58.00 per weekly paycheck ($3,000 divided by 52).

If this sounds too intimidating, simply write down where you are now and where you want to be later.

Example: $100 in savings account now and $1,000 in savings account later.

No matter how you write them down, goals provide a framework for investment decisions and help narrow down your choices. For example, if you have a short-term goal, like freshman year college tuition in a year or a new car purchase in three years, you’ll want to keep this money liquid so that there’s no loss of principal.

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On the other hand, if you have a long-term goal, like college expenses for a newborn or retirement in twenty years, cash assets are a poor choice due to the risk of loss of purchasing power. Over long time frames, stocks provide the best historical return of any investment type.

A financial goal everyone should have is to build an adequate emergency fund. This is savings set aside to cover unanticipated bills or monthly living expenses if paychecks stop (e.g., unemployment). Too often people use credit or borrow from family members in an emergency because they lack a savings account to fall back on.

Make establishing an emergency fund a priority. Fund it with 3 to 6 months of living expenses or whatever amount provides peace of mind. When you withdraw money from this account, pay yourself back on a systematic schedule. Discipline yourself to use emergency fund money only for real emergencies (e.g., car repairs).

Follow this advice from America Saves: “Set a Goal. Make a Plan. Save Automatically.”

As the soundbite indicates, setting goals is just a starting point. To turn goals into action requires habits (e.g., save $100 monthly) or, better still, systems (e.g., make automated savings deposits via payroll deduction or checking to savings account transfers). Habits are ingrained behaviors that people do without thinking and systems are processes that people follow. Both habits and systems are repeatable and foster a sense of personal control.

A key to savings success is goal-setting. Remember, people don’t plan to fail, they fail to plan.