What Is a SMART Goal and How Can You Apply It to Your Finances?

If one of your intentions for the New Year is to take more control of your finances but you’re not sure where to begin, starting with some kind of structure or framework can help.

“The start of a new year is always a good time to reevaluate your goals,” says Jenny Raess, Advice Integration Lead at Northwestern Mutual. “You have a full 12 months ahead of you and you could really see some progress within a year, even on a longer term goal.”

One framework that can help? Setting SMART goals. “I think with any type of goal that you're setting, thinking about the SMART components can be really helpful, whether they're personal or financial because it helps them feel like they're more achievable,” Raess adds.

So what is a SMART goal, and how can you apply it to your finances?

What is a SMART goal?

The SMART method started as a way to set performance goals within the workplace, but many people find it useful for meeting other types of goals as well. Setting a SMART goal means the goal should be:

• Specific (be specific so there’s no mistake about what you’re trying to achieve)

• Measurable (make it quantifiable to help you track progress)

• Achievable (realistically attainable)

• Relevant (ties to larger objectives and values)

• Time-bound (there’s a date you’re aiming for to complete the goal)

SMART goals can work well for your financial life because they can help goals that feel somewhat far off feel more tangible and achievable. “The benefit of using a system like SMART is that it allows you to condense those big goals into more bite-sized pieces,” Raess says.

This means the SMART goals you set for your money will actually be smaller chunks of your larger goal along the way, which Raess says can help with keeping your momentum going. “I think the SMART method also gives you a little more personal investment, because you really think through the five different traits of the goal,” she says.

What is an example of a SMART goal for your finances?

So, how can SMART goals be used to help you with financial goals?

It's likely you’ve already thought about the goals that are important to you, whether it’s building an emergency fund, buying a dream home, retiring by a certain age or paying for your children’s college. But have you thought about what it would take to actually reach those goals?

Here’s how SMART goals can help. Let’s say you’ve started an emergency fund in hopes of saving up six months’ worth of expenses, but you’re still about $3,000 short. After crunching some numbers, you think you have enough to meet that goal this year.

Your SMART goal could go something like this: To make sure I’m prepared for surprise expenses, I will save $250 a month starting in January in order to have $3,000 extra in my emergency fund by the end of December.

This goal is:

• Specific (you’re beefing up your emergency fund by $3,000)

• Measurable (which breaks down to $250 a month)

• Achievable (and is realistic with your budget)

• Relevant (ensures your finances are protected if a surprise expense hits)

• Time-bound (you're aiming for the end of the year)

Here’s another example. Let’s say you have a bunch of credit cards you’re trying to pay off, and you’re not sure where to start. Use a credit card interest rate calculator and see how long it would take to pay off your highest interest rate credit card with the current minimum payment, and then with a higher amount that fits into your budget. (Starting debt payoff with the highest interest rate card is a strategy known as the avalanche method.)

Your SMART goal could look something like this: To start putting a dent in my credit card debt, I will put an extra $100 a month toward my highest-interest-bearing credit card for the next 12 months to pay it off. Then once that card is paid off, you can recalculate a new SMART goal for your next highest-interest-rate card.

How SMART goals are part of a financial plan

If you’ve worked with a financial advisor on a financial plan, then congrats — it’s likely that you’re already using the SMART method, because a plan looks at your goals and breaks down what you need to do on a regular basis to make progress on your goals over time, based on your current financial situation.

Plus, an advisor can help you crunch numbers on calculations that aren’t as easy to do on your own, like if you're saving enough for retirement or college tuition, or need to prioritize paying down a lot of different types of debt — and they can help you readjust your plan if your income or life circumstances change.

Remember, SMART goals should reflect what’s realistic for your situation, so don’t be afraid to adjust them as needed. “If there might have been a little bit of a setback, reevaluate,” Raess says. “Then get back to the goals as soon as you feel comfortable and are able to start doing so.”