Having a consistent and effective financial plan will enable you to achieve your financial goals and financial security. The 2008 Global Crisis and 2020 Pandemic have taught us that it is crucial to set aside a contingency fund. Many people lost their jobs through these crises and tried to survive without an income for many months. The results of not having a financial plan can be dramatic in case of unexpected shocks and expenses.
A personal financial plan covers the analysis of your current personal finances, determination of your financial goals, and development of strategies to fulfill them. Since you put together the financial plans to achieve your financial goals, they are essential.
Financial goals depend on the desires of an individual and would be different for everyone. Buying a home, achieving financial independence at an early age, and saving for retirement are the most common examples. Whatever your financial goal is, a sound financial plan must be S.M.A.R.T.
SMART is an acronym first used by George Duran in his article about the features of a business's management goals. Each letter defines an assessment criterion for the goals and objectives. There are different versions of SMART developed by other authors. Personal financial goals use the followings in this article:
Specific: Make your financial plans well-defined and precise. For example, saving money is not a plan. Whereas, saving $100000 in 10 years to send my kids to college is a clear plan, in which you specify what you want and why.
Measurable: Define how you measure progress and adjust your progress measure whenever necessary. You can calculate the money you need to set aside each month/year to have $100000 in 10 years. You should consider the yield you can earn and the expected change in your income/expenses to calculate the expected amount you can save in the future. For instance, if you expect that your income will increase by 10% and you will be able to save 10% more every year, then you can use a growing annuity formula to calculate the amount you need to set aside today.
Attainable: Your financial goals should be possible and realistic. For example, you can’t save $100000 in 10 years if your annual income is $9000 and the yield you can earn is 2%. It would help if you also consider your living expenses. On the other hand, you set too conservative goals, such as a saving target far less than the amount you can save, you will misuse your excess funds and waste the potential of your financial plan.
Relevant: Your financial goals should be in line with your values and aspirations. If you want to start your own business, you should not make plans to save for luxury vacations.
Time-based: Set a target date for your financial goals. Without target dates, your financial goals will not de clearly defined and effective. You might not prioritize your financial goals and lose your motivation.
Some of your goals will be long-term, such as saving for retirement, whereas others will have short-term target dates, such as buying a new television. From time to time, you might have difficulties complying with your financial plans and can’t reach your financial goals. Reviewing your objectives, adjusting them, and going back on track is also part of the financial planning procedure.