Everyone says that goals must be SMART. But sometimes, SMART just doesn’t work. Sooner or later, everyone feels the weight of these goals. And then they become just a decoration on our walls. But there’s a SMARTER way to do things. There’s a SMARTER way to setting goals for your money.
I’m sure many of you are familiar with SMART: Specific Measurable, Attainable, Relevant, Time-bound. But here is what SMARTER goals look like.
Envision this scenario. You go to a salon or a barber and they ask you for what haircut you would want. Many of us know that it is not smart to tell your hairdresser to surprise you. You would not be so vague and tell them you just want a short hair. That’s a big no. You would at least describe the type of haircut you want. Some would even go as far as bringing a picture just to make sure you are on the same page. Congratulations, you just gave out very specific instructions.
The same with money goals, you have to be specific. Let’s work on this goal to make this specific.
Goal: I want to have financial freedom.
What does financial freedom mean? What do you need to do to gain financial freedom?
A more specific goal can be any of the following. Notice that in the process, you have defined what financial freedom means for you.
Now you know what you want to achieve. It’s time to make it measurable.
So back to the hairdresser scenario again, you want a shorter hair. So you have to tell him by how much you want your hair to be shorter. Do you want it shorter by two or five inches?
Now back to our example, here are our measurable goals. You need to know how much you need to do in order to say you are achieving your goals. If you’ve checked yourself against your personal finance coordinate system, this will be an easy exercise for you.
When setting goals, ask yourself if you know if your goals are realistic and possible.
The good news is that we have a lot of self-made millionaire stories so I’m convinced that there are hardly any reasonable money goals that are not attainable.
The question now is, do you have what it takes to attain them? Most of the time, we are the ones who put the limits on ourselves. Or we are not ready to give what it takes in exchange for achieving our goals.
So instead of asking whether your goal is attainable or not, I would advise you to re-phrase the questions to these:
Again, look at your life and your needs. Is the goal you are trying to pursue relevant to your life. Do you see its importance to you?
Why do you want to be financially free? What does it entail? What will you have after achieving this goal? Is this really a need for my goal?
Let’s look once again at our goals. Do you think all three are relevant if you want to achieve financial freedom?
Paying off your loans and building a passive income are relevant goals toward being financially free. But examine the third goal. Do you think it is a goal to achieve financial freedom? Or is it a goal after financial freedom has been achieved?
I propose to look at this travel budget goal as not relevant to the goal of being financially free. I’m not saying that it is not a goal. All I am saying is that to be financially free, this goal is not relevant.
In addition, do you understand why it is important for you to achieve these first two goals?
Our lives our time-bound, so should our goals be. If we don’t put target dates, we’ll soon find ourselves procrastinating. So make sure that you set targets to your goals.
In this stage, make sure that your timing is reasonable. If you have to build skills or to do other steps to make this happen, factor it in.
Make your goals time-bound as below:
The next step to is to find goals that will make you feel for it. There are already many goals out there that are SMART but they fail to be realized. Do you know why? That’s because it lacks the human factor.
When you set out your financial goals, do you do it because you want to, or because you need to? Both needing it and wanting it are strong moving forces to achieve your goals. However, if you are just doing it because you need it, you might not enjoy the process of achieving your goals.
If you don’t have an emotionally-gripping desire, it will be difficult. So find that strong reason why you want it, other than needing it. This involves an internal look at ourselves.
I ask you again, do you have that emotionally-gripping desire to set your finances right?
I strongly believe that our goals should be directed toward what is really right and good. We should never lose sight, and we should not shut that voice, that calls us to be a positive catalyst in the world. Though our spheres of influence might be different from each one, we should be conscious that our goals do not proliferate the evil in our society.
Based on experience, I really believe everyone is good and if you don’t make sure that your financial goals are righteous, the lack of peace that you will feel when you achieve your goal will rob it of its sweetness.
How do you know if your goal is righteous? I only have a few points below.
Although it’s SMART to achieve your goals, nothing’s SMARTER than achieving peace within yourself.
Don’t just be SMART, be SMARTER.
Go and inspire the world.
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Before you embark on a journey to having an effective personal finance, you need to know where you stand, and then decide where you want to be. Having established these two points, you can now develop a personalized strategy. Let’s find out where you are using the Five-Point Personal Finance Coordinate System consisting of loans, relationship between income and expenses, emergency fund, insurance, and investments.
After knowing the right principles/mindsets you need to have for a good start in your journey to an effective personal finance, you should now be in a better position to objectively look at where you stand. This assessment allows you to see what’s missing in order for you to have a solid foundation in your journey. These are the basics – The Five-Point Personal Finance Coordinate System.
Are you able to pay off both the capital and the interest on time, and according to the payment schedule?
All of us had to take loans at one point in our lives. Loans helped many people tide through difficult times so loans are not really bad. If you are to pay for college tuition, a loan is good; otherwise, you may not be able to pursue your studies. If you are sick, and the insurance has run out, you may need to get a loan, either from the bank or from your friends and relatives. If you are retrenched, a little financial help might be needed until you find the next job. The point is loans can be helpful.
However, loans can be crippling if they are not handled well. Credit card interest rates are at 24% per annum. Some bank financing can cost you 10-15% per annum. And you have not even started looking at compounding of interests! Some people claim that Einstein said that one of the greatest inventions is the concept of compounding. I’m not really sure if it is true that he said that but I know that compounding spells bad news, especially if you can’t even pay the capital.
So look at your loans. Are you able to pay off both the capital and the interest on time, according to a payment schedule? If yes, or if you don’t have any loans, then you have a solid foundation on this one.
2. Relationship between your income and expenses
Although the norm right now is still having a fixed income through employment, many are jumping into the freelancing bandwagon and have variable incomes. However, the principle in budgeting still remains the same. Your income must always be greater than your expenses.
Today’s credit system makes it possible for many individuals to live beyond their means. Their expenses are higher than their income, thus they are forced to max out their credit cards. The novel ‘Confessions of a Shopaholic’, which was turned into a movie, epitomizes the case of supporting expenses beyond one’s income through the credit cards. Eventually, the credit limit is reached, and you’ll have to start paying off your loans.
The only rational solution is to start living within your means. If you find that your expenses are greater than your income, find ways to either lower your expenses, or to augment your income. There are many ways to do this, so it’s your pick.
Look at your expenses. If your income is greater than your expenses, then you have it going good in this point.
3. Emergency Fund
Do you have a readily accessible amount of money good for 6 month's expenses?
If something happens tomorrow where you will need a huge amount of money, do you have readily accessible cash?
What happens tomorrow is not certain. You can lose your job, you can meet an accident, your house might catch fire. I’m not wishing you ill, but you never know when you’ll need that extra money for unforeseen necessary expenses.
So you have to make sure you have an emergency fund. An emergency fund is a sum of money which you have easy access so you can use it immediately. Typically, the emergency fund is about 3 – 6 months of your monthly expenses. It’s expenses, not income. That’s why it pays to minimize your expenses, which we just talked a while ago.
However, you need to also factor in the circumstances and times where you live. If you are an employee, research shows that it takes about 6 – 12 months to get a new job. That may mean 6 – 12 months without an income. So I really suggest you take a look at your emergency fund and realistically establish how much you need.
So where are you at building your emergency fund? If you have about six months’ worth, then that’s good. I know it might be a huge amount of money but better be ready than be sorry.
Are you adequately covered by insurance?
I would recommend you work on this concurrently with the emergency fund. But you may want to vary this based on your needs, and if your employer provides insurance for you.
The key question: Are you adequately insured?
The same with emergency fund, you never know what can happen in the future. You need to plan for accidents, disabilities and early critical illnesses. I really wish I could say it’s easy to be healthy these days, but nope. So get yourself protected from the financial stresses that come with getting sick. You can choose to start small. But the important thing is to start.
As for the coverage, really take time to understand what you need. There are many insurance schemes with riders, and not all are created equal. So go ahead and talk to your agent. Don’t be afraid to say ‘No’. Really understand the coverage you need before you decide.
For me, I decided to forgo having an accident plan. I thought that if ever I have a major accident, I’ll need to be hospitalized anyway, and with that, I’m covered. My insurance agent was telling me that I could even use the insurance if I cut my finger. So I calculated how much I’d probably have to spend for that one finger as compared to my premium. I decided that the probability was against me. If ever I cut my finger, a Band-Aid will do. But I have hospitalization and life insurance plans.
What about you? Are you adequately covered by insurance? If you are, then that’s another point that puts you in a good place.
Do you have investments? Are you happy with your investment strategy?
What would you consider an investment?
An investment is something that you acquire at a lower value to be sold at a higher value on a later date. An effective investing requires a personalized strategy.
Remember that our investment styles are different, and it should be. Your investment strategy must take into consideration the following:
Personality: What is your risk appetite? Can you take the heart-pumping rollercoaster ride in the stock market? How patient are you with wanting your returns? Do you want to have a direct control or are you willing to let others run your investments for you? Would you rather have a business?
In reality, we all have your different preferences. Don’t hesitate to acknowledge this when you are planning. After all, you’ll be in it for the long haul, so make sure it suits you.
Lifestyle: How much time can you spend to take care of your investments? How much money can you set aside with your current lifestyle for investment? Are you willing to make changes to your lifestyle?
When you start investing, don’t forget to live in the present as you invest for the future. Enjoy the ride.Plan gratification, don’t delay. So make sure that it investing fits well into your lifestyle.
How can you make investing and your current lifestyle complementary? Learn about the different vehicles of investing. Read books, learn from others. And decide for yourself. Own your decisions.
Your goals: Endeavors can only be successful if there is a clearly defined goal. Otherwise, you’ll run around in circles, and many things will not make sense. Investing needs a clearly defined goal specially because it can be demanding.
You need to know why you are investing and what you hope to achieve.
Do you have investments? Are your investment strategies personalized? Are you comfortable with them? If yes, then that’s a good place to be in.
This wraps up the article on knowing where you are. How did you do with the Five-Point Personal Finance Coordinate System? Where are you right now?
In the next article, I will talk about setting financial goals. Together with this article, you should have a better idea what you need to do for your personal finance.
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Often, people quick dive into budgeting and investing when trying to handle their finances. While these activities are the essence of effective personal finance, the backbone is having the right mindset about personal finance. I live by these three principles – money is not the root of evil, I will control my money, and personal finance is personal to me. These principles helped me carry out my financial activities and stay happy.
Many people wake up and tell themselves that today will be different from the other days. Today is the day they will take charge of their personal finance. So hurriedly, they take out pen, paper or open an excel file to start budgeting. Some even start contacting financial advisors. Without firm conviction on their beliefs on money and handling money, they soon get tired, disillusioned and revert back to their old habits. They end up feeling disappointed because they had a goal, but they didn’t achieve it. And setting up to achieve a goal and not being able to achieve the goal is torturous.
What happened? I’ll tell you what happened. They worked on the how without establishing their principles and mindsets. They looked at what techniques must be used without understanding what is their inherent belief about money. As with most successful projects, you need to work on your beliefs and convictions first, and then set to work to achieve. Your beliefs translate into actions, therefore it is important to have the right mindsets.
Here are the three principles one should understand, and hopefully adapt, in order to be happily successful with their personal finance. I emphasize on happy because at the end of the day, you wouldn’t want to be miserable after all the savings and investment activities that you’ve done.
Money is not the root of evil. The love of money is the root of evil.
There are a number of people who say that money is the root of evil. They believe that if they want to have more money, they are being selfish. They also think that they should not work to have more money since they might become evil in doing so. Well, I wouldn’t blame them. After all, there are many relationships that have soured because of money matters.
You should control your money. Don’t let money control you.
The first step is establishing that the love of money is the root of evil, not money itself. Once you have acknowledged this, it is easier for you to control your money.
Money is not your master, you are the master of money. Money is a tool that helps you live your life. And you should live your life, and not let money run your life. Learn to use your money, just like how you use you pen, paper, pots, etc. It helps you achieve something, but it is not the goal in itself.
Your end goal should not be earning more money. The end goal is earning enough money to support you and your loved ones and to help you reach your dreams, whatever your dreams may be. I say this again, learn to control your money.
Don’t lose your family and friends over your quest to earn more money. And don’t lose your health over it. At the end of the day, money enables you, but you should remember that there are things money can’t buy. Money is just a tool. Put money in its place.
Personal finance means it must be specific to you, and you alone.
Finally, you should know that there is no one size fits all. One may be comfortable living austerely, but you might need a bit of financial allowance to live a little more comfortably. You have to know yourself and know what you want and need. Yes, it is ok to pursue things you want, reasonably, of course. Be comfortable in planning for your gratification.
When making your budget and plan, be sure to acknowledge your strengths and opportunity areas. You can always grow and become better, but growing better does not have to mean growing faster. Grow at your own reasonable pace. If you need to start slow, then start slow. If you can’t save $100 now, start with $10, and make a plan to increase it once you’re more used to it. The important thing is to start.
Also, while having a financial advisor is good, I wouldn’t recommend that you work with one immediately. There are some financial advisers that want to push sales to you, so they are not really 100% concerned only about your welfare. It’s just human nature to have vested interest. But once you are clear about yourself, your principles, your goals and ambitions, then you can engage a financial advisor knowing that you will be working with him as how it should be. He is your advisor. He gives you information on what is available but you make the final decision. If you are comfortable to make decisions and own them, then it’s a good time to work with a financial advisor.
Remember, you need to put the ‘person’ in personal, and the ‘I’ in finance. That’s the time you’ll have a satisfactory personal finance strategy.
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Delayed gratification in financial planning has created an impression that the ultimate gratification is achieved further down the road - when one is retired. This may not work for many since this asks us to live for the future and 'forsake' the present. Instead of delaying, plant gratification. Don't feel guilty; plan to splurge and reward yourself along the way to keep yourself motivated. The key word is plan.
Delayed Gratification in Financial Planning
Delayed gratification, or deferred gratification, is the ability to resist the temptation for an immediate reward and wait for a later reward. Generally, delayed gratification is associated with resisting a smaller but more immediate reward in order to receive a larger or more enduring reward later (Carducci, 2009).
Instead of just delaying, have a concrete plan in your financial planning to reward yourself handsomely in the not so far away future. Don't feel guilty about it. After all, you need to live in the present, and plan for the future. So make sure you cover how you'll live in the present while you are planning for the future.
How to Plan for Gratification?
In delayed gratification, you need discipline and self-control to delay actions. In planning for gratification, you need discipline to follow through your plan.
Ask yourself these questions.
What are my treats?
Identify what you enjoy doing.
What you enjoy might be different from what others enjoy. Some might enjoy traveling, but you might be the person who enjoys fine dining. You may be a shoe collector, or a bag collector, or an action figure collector.
It's different from everyone. So know that treats that make you happy. A lot of my friends enjoy touring different countries, but right now, what I enjoy most is eating good food. I have selected my treat. What's yours?
What are the things I can only do now?
Know if the treat is something you must do now, because you may not be able to do it in the future.
Money lost can be recovered. But time lost is forever lost. There are moments that call for splurging - like treating your loved ones once a year. Like what MasterCard says, some things are priceless. (This is as far as I would agree with credit cards).
I hate to remind you of this, but your body is also not going to be young forever. While in Australia, there is no maximum age limit to skydive, your physical body will dictate if you can still jump out of that plane and land safely.
There are just some things that cannot be postponed.
Can I afford it with what I have now?
Don't go in debt just to treat yourself.
The next question to ask is whether you can afford it with your current finances, with your savings and investments.
As I said earlier, I don't entirely agree with MasterCard. I strongly recommend that you don't use your credit cards to fund your treats if you are going to use the future money that you don't have right now. Although I know it's a credit card, I always treat mine as a debit card. Unless it's a matter of life and death, my credit limit does not dictate how much I will charge on my credit card. How much money I have in the bank does.
There are two reason why I'm saying this. And I would like to emphasize this point.
1. The interest rates are hefty.
2. What will happen in case of emergency?
Which brings me to my next point.
Do I already have an emergency fund?
Make sure you have funds to cover unforeseen events.
Good planning includes contingency plans. Having an emergency fund is one of my requirements before I would even think of having a very big treat (meaning about 2 - 3 month's worth of income) for myself. After all, unexpected things happen. And since I'm advocating planned gratification, this is part of good planning as well.
Typically, an emergency fund is worth your six months' monthly expenses.
Do I have a financial plan for retirement?
Living in the present doesn't mean you do not plan for the future. The future is still part of our life.
Indeed, YOLO is the in thing right now. You Only Live Once. But if you live in the future, that life is part of your one life that you live.
Always make sure you have a plan in place for retirement. You may plan not to allocate funds to your retirement immediately, but you have to identify a practical date when to start, and stick to it.
How Long would you delay?
From my perspective, you have to decide how long.
Ask yourselves the questions above. The last three questions dictate how long you will delay. There is no fixed time because everyone's goals and plans are different. But remember, don't feel guilty about treating yourself. You have to keep yourself motivated and you deserve to live in the present.
As I said earlier, the discipline is in planning, not delaying.
To understand more about personal finance, you can read some books below.
- Be the master of money.