Today I would like to talk about smart financial goals. “Smart” is always the meaning of a clever and thoughtful way to achieve something. As a lot of people, also including me, fail to achieve their financial goals, I wanted to change it for my perspective some time ago. Now it is the time to plan again for 2021 in a detailled way, wherefore I was researching the web again for content. I want to present you, what I have found and in which way it affected my goal planning.
Honestly I mostly stumbled through my financial life. I had always been someone with a good salary, already starting at the age of 12. But I was never really able to save it as small fortune for myself. Turning into my 30’s I had a good-selling online-shop, which I hoped to be the turning point. But it was not. It even turns out to be more or less a nightmare – my biggest fail with financial things so far. After slowly recovering from this impact it was the first time bakc in 2015 I sat a financial goal. Looking back my way has not always been fun, but worth any moment.
Money will affect your life anyway
In 2015 money was very present for me. Nearly everything in my life was just spinning around this topic. That was mainly because there was a huge amount of debt out of my business with which I failed. I have never had the situation like Dwayne “The Rock” Johnson is quoted with, when he said he just had 7 bucks in the pocket and no idea how to survive the next day. No, in comparison to others I was still able to live a quite comfortable way. But, and that was my biggest point here, money dominated my life. I was thinking about it nearly every second.
- How will I be able to pay the debt?
- How long will it last to be debt free?
- What will happen if another financial surprise will come around the corner which I did not expected?
I was quite dependend on a lot of things. I was bound to my salary to make regular down payments on my debts. Additionally I tried everything to earn and/or receive more money to make an extra payment on my credit. That was on the one hand “fun” as I was able to see the progress with the smaller debt-sum, but on the other hand I worked for someone else and increased working for another one, to pay the it to the bank.
Since 2017 I am debtfree. I already started investing into P2P lending and ETFs in 2016, but those savings were quite small. But it was my personal formular to overcome the moment when I was debtfree and not to know what to next with my money. And this was the time, when I made my first financial goal planning. I was planning my personal finances already before, but most of the money was used to pay down the debts. So now, it was the first time I was able to make real savings and to really work on my wealth.
Looking on my net assets was ways more motivating
Until 2017 my financial situation was mainly influenced by the credit. But after paying them off, I felt the need to work on improving my personal wealth. It was a time (and still is), where I was reading a lot about financial stuff to improve my knowledge about it. And exactly at that time I first met the idea of smart financial goals. No more debt planning, but just saving into my own pocket – that was a great feeling!
As you maybe know, I love to plan. My whole life is more or less planned in a Excel-sheet. And it is getting bigger ever year, when I try to improve my planning and as well my results. But enough of that personal and theoretical stuff – let’s dig a little bit deeper into how to find smart financial goals!
Everybody knows the S-M-A-R-T principle – but also financially?
Somewhere most of us will heard of the SMART-principle. It is a way to find a meaningful goal. When I choose a goal like “making a lot of money”, this might motivate me for a week or two, but afterwards will unfortunately fail as there are no specific goals to work on. What is supposed to be a lot of money? Let’ ask your neighbor and Jeff Bezos from Amazon. Maybe your neighbor thinks of 100k, but Jeff Bezos is worth several billions of dollars. As you might see, the difference is pretty big.
So SMART is the shortcut for: Specific, Measureable, Achieveable, Realistic and Time-Limited. A goal has to be able to find answer to all of those aspects. “A lot of money” does not match anything from it, whereas it might be legit to be a goal, but it is not a very good target. SMART is a system you are to plan any goal with. It is not specifially for financial targets. Usually it is used in projects, companies and stuff like that. But there is no restriction to not use for your personal finances.
As I am often working with this method in my daily job I am quite familar with describing and making goals based on this method. I just want to share a short thought about any point with you, to give you an idea how to use it. When you already know the principle and how to use it for your smart financial goals you might jump to the next headlnie.
Specific goals have a good description
The first letter is “S” for specific. Finding a specific financial goals usually means you have to describe it with a figure or number. “A lot of money” has no aspect of it, but for example “100k net assets” or “200 dollar per month”. Find some way to put your target into numbers. Of course you might also use percentages like “20% of my income”. Nevertheless the specification has to make things that detailed, that there is no room for discussions. Words like “many”, “much” oder “a lot of” should not be included in the description.
You have to describe you goal specifically to avoid any doubt or interpretation of it. 200 dollar per month are exactly 200 dollar per month, not 189 dollar – easy as that! I am always feeling pressure while describing my goals that way. Meanwhile I am fine with it, but putting your numbers down, whatever they are, makes your goal more real in my eyes.
Measureable goals are easy to commit on
With finding your goals you should always think about committing on them for the next period. Choosing a savingsrate of 500 dollar today which you take down tomorrow and raise next week is not really valueable. If your income is that volantile, you should maybe use percentages or a total sum.
It is important, that YOU are able to calculate the achievement. No one else! You are taking responsibility of your personal finances whereas you are the one to rate your way. Therefore you should be able to measure your target every period to see your progress. If you are on the line, that is fine. But getting off the track needs some re-adjustment to get back on the path again. So you need be able to measure your goals at any time.
Achieveable – the sky is the limit
Usually this aspect is quite easy and you can make your tick here – especially with financial aspects. There have been people into debt with billions of dollars but also with net assets of billions of dollar. So this is your room to find something.
But there are things which are not achieveable like “save 110% of my income”. Of course you might get another job and earn a little extra, but you still esrn 100% and will not be able to save more than that. Mainly this aspects is very easy financially seen, as there are just a very few things of not being possible.
Realistic quotation, whether your target is doable
Setting a target of saving “100k next year” is okay as long as you are able to afford it. Earning just 2k over the months, you will not be able to make you saving as much as 100k. This is not realistic. Several people quoted, that we overestimate what to achieve within one year but underestimate what we are able to achieve within the next ten years.
If you target is to hit the 100k net assets, but do not know how to afford it, you might split the amount into pieces. Depending on your income you might go for 10k per year, which is still 834 dollar per month to save. After ten years you will hit your target. In the shortrun, this goal is not realistic, but in the longrun you will be able to hit it.
The same is valid for your credit. Being in debt ain’t bad. But you should have a plan to work on your credit and pay it down. Instead of “net assets” you might use “debt payments” here. The only thing which is bad to stay in debt or take a new credit for any expenses. Make your vision count and not anyone elses’ vision of earning interest from you.
Time-Limited to avoid stretching
Just related to the last point you should find a time limit to achieve your target. Creating a bigger vision beyond the next year will automatically give you this limit. Wanting 100k of savings within the next 10 years, you need to save 10k every year. This is your time limit. At the end of the next period you have to have 10k on your account – no matter what!
Those numbers do not necessarily go in one line as you might use the compound effect. For example, if you want to achieve the 100k net assets in 10 years, you have to find a way to make e.g. 6% per year. This might be an ETF, Bondora Go and Grow or whereever you will receive the interest. Go and Grow will pay you 6,75%, wherewith your monthly savingsrate is 589 dollar. Over the time you “just” have to save about 70k as the other 30k to your target are interest payments.
Daily, weekly and monthly smart financial goals
Setting a smart financial goals once a year is great, but you always have to track yourself. It does not make any sense to decide “I want to save 10k until the end of the year” and look into your account after 364 days. It is important to track you achievement at least monthly. You also might track it weekly or daily, whatever fits best for you.
Therefore you need to break your target down into the right time dimension. Tracking it every week means to divide your monthly goal by roughly 4. Coming back to the “10k per year” means a saving amount of 834 dollar per month and 209 per week. You might also divide your annual goal by 52 to receive a better number, as dividing the monthly amount by four will lead to an over-achievement of nearby 9% – which ain’t bad. But helping yourself and your discipline to stay on the track it is always easier to take the lower number.
From my personal point of view you should make a “appointment with your personal finances” every period at a fixed time. That does not need much time, maybe 30 minutes. Every first of the next period you should for example collect all your data and check, whether you achieved your monthly goal. This might lead to a surprise, when you have not tracked it during the month, but that is up to you.
Nevertheless I highly recommend to make that “date with yourself” reguarly anyway.It will give you an intention about the current situation. Additionally you always have the chance to re-adjust your work. You should not skip the plan when you missed in once. Maybe you will be able to catch up the next month and the numbers overall are fine again.
Maybe you are failing once, but avoid it for the next time
There is quote from Churchill I think which says: “No plan survives the first enemy contact”. That does not mean your plan necessarily has to fail. But be prepared! Adjust your plan to the real-life conditions. Typically there are just small parts of your plan which fail. Maybe you are not able to afford 834 dollar savings per month, but 750 dollar. So your plan fails at 12%, but not in total. Make yourself a plan how to go for the missing 84 dollar next month. Find them as fast as possible to follow your target. If your goal was not realistic at that point you might change it, if there is no opportunity to hit it.
Failing once is not bad at all. But doing the mistake twice or more times would be bad. That means you are either planing unrealistic or not putting the work in, which is necessary. Whatever it is, you should locate the problem and solve it. Just because you want to have 100k net assets, they will not come. It is you who is responsible to achieve the goal – no one else. So it is up to get shit done.,
Work with a vision of your smart financial goals
I started working with a vision back in 2016. Making my way out of the debt was my main target, but it was just one step. Several had to follow. And they did. But over the time, planing and sticking to your goals is a job. You have to remind yourself of it and you to do the work. It is easy to skip something, as you already achieved something. By the end of 2019 and the beginning of 2020 I focussed mainly on goals outside the financial area. And this led to a situation where I started to forget about my smart financial goals. I skipped one savingsrate and I lowered the overall goal of my savingsrate. And the worst thing: I skipped the tracking for several months!
After the covid crisis went over Europe a lot of things were happening in the P2P lending area. This is why I luckily found my way back to my goals. My sabbatical during the summer was the again-initial point of where I commited to my goals. Looking back in my tracking overview my numbers increased again, which is not just due to the stock market performance. Reminding myself of my personal vision and my plan made me getting back on track. As I think it is quite usual to get off the track it is important to find out about it as soon as possible. Maybe I would have not skipped my savingsrate when I made myself aware of the consequences to achieve my vision later.
Personally I have a vision, which is everything happening 10+ years. Those things are quite bold in my life and are motivating me. Every year during my phase of planning I am re-adjust my plans below the vision. It still keeps to be the same, but as I move forward my 10- and 5-years-goals are moving one step on. Usually that does not take that much time, as those targets are mainly bulletpoints on a list. But creating my one-year-plan for the next period is taking me a lot of time. In my eyes this is essential as those figures are what I have to work on from tomorrow.
I do not know, whether 10 or 5 years are right. In my company we are working with a 7 and 3 years model. Does not feel wrong either. I guess the right period for you is what you feel comfortable with. The main point here is to have a goal for the next 3-5 years and another for the next 7-10 years. Those have to fit into your vision to make sure you are working on it.
Make your smart financial goals 100% happen!
However your plan is, it is you to make things happen. You have to choose your goals a bit beyond your comfortzone and your abilities, but not that far away to scare the hell out of you. If you are able to find a goal in that small area motivating you most, you will be able to achieve it.
In my eyes one of the key factors to achieve your target is to track your way. Especially monthly or weekly goals are something you will be able to track with a very small amount of time. And you will find out very fast, when things are not running like you planned them. You will be able to adjust your path and go it in a better way next week.
My personal smart financial goals
When planning the next year I look at several areas of my life: Finance, family, fitness, sidebusiness and passion. For every one of the I make one to two targets. This time I decided to increase my passive income. Maybe you remember that my bigger target is to reach financial freedom. For me this is an amount of 5k monthly coming from anywhere. Passive income is capital and interest gains for me, but also other projects like audio-books or books.
If you follow my reports the average passive gain in 2020 was somewhere around 65-70 Euro. That is quite far away from my target. But as I stopped most of my income producing sidebusiness acitivies by the beginning of 2020 it is the logical outcome. However, I do not want to think about the “why” but look into the future.
Passive income is supposed to be paid independent from you work. So writing a book is work, but the sales afterswards are mostly independent from that. Therefore I choose the goal to be 1.000 Euro monthly from passive incomesources. Already there are about 65 Euros from P2P lending and some more from dividend shares and ETF, but for me gaining another 900 Euro until the end of 2021 is a huge challenge. I know people who already achieved it, so the goal is SMART:
- Specific – 1.000 Euro monthly from passive incomesources
- Measureable – It is measureable anytime I want to
- Achieveable – Yes, I personally know several persons who achieved it
- Realistic – Another yes, as I have to focus on it
- Time-Limited – To be honest, the target is hit, when I achieve the amount during December 2021
So, it is absoluty doable for me and I will report about it within my report every month. Currently I do not want to restrict the goal more into its pieces like the share of P2P lending for example. I do not know which setting I will use. Time and the next months will show and for me it is more important to get things going as soon as possible.
What are you smart financial goals for the next year? Comment them below!