SMART Goals - The right step in begininning your investment journey

article image

The meaning of SMART in financial planning

Setting up an investment portfolio with investments in various assets is imperative to maximise returns and minimise risk. Samarth, a 25-year-old getting a good salary, is of a similar opinion. 

His office is now shifting to a location far from his home, and commuting to that location will take time. After much contemplation and evaluation, Samarth now plans to buy a bike by the end of next year. To do that, he is planning on investing in various assets so that by the end of the next year, he will have the amount ready and won’t need to pay any EMI.

And with the defined objective of buying a bike, Samarth will follow the SMART Goals technique to accomplish this goal. SMART stands for:

S - Specific

M - Measurable

A - Achievable

R - Realistic/Relevant

T - Time-Bound

Let’s understand in detail each of these

S - Specific

The goal needs to be clear, specific and unambiguous. 

When you set vague goals, achieving them becomes harder. And this is true in every aspect and not just in investing. Want to lose weight? Just working out won’t help. You need to be more specific. For instance, “I will lose 10 kgs in three months by working out three days a week” is a more specific goal.

For Samarth, a specific goal can be to invest ₹8,000 every month in an equity fund with a return of 12% if he wants to raise enough money to purchase a bike by the end of next year.

M - Measurable

Okay, so Samarth has specified his goal. But how will he know if he is on the right track to achieving the desired amount? That’s where measurability comes into play.

The goal should be clear and specific enough that Samarth can measure the progress towards it. He can keep a constant track of the performance of the funds he’s invested in and make decisions accordingly.

By setting clear metrics of the goal, it becomes easier for Samarth to adapt his financial plan as time goes by. If the fund isn’t performing as expected, he can always look at alternate instruments and move his money accordingly.

A - Achievable

The goal that you set should be such that you should be able to figure out ways of achieving it. The goal cannot be stretched such that it is beyond your means, and ways of getting to it become a challenge.

The goal should be designed such that you should feel challenged but defined well enough that you can achieve it. Ask yourself these questions -

  • Do I have the resources to achieve this goal? 
  • What are the gaps I need to cover?
  • Have others done it before successfully?

Once you have these answers, you’ll know whether it’s possible or not.

R - Realistic

This is on the lines of the previous one with a slight difference. While achievability talks about your capabilities to reach the goal, the realistic parameter will evaluate how the goal fits into your overall plan. 

Another way to differentiate in the case of Samarth’s goal is, on the achievability, ask “can Samarth meet this goal of buying a bike?” while realistically asking, “should Samarth meet this goal of buying a bike?”.

If Samarth’s goal takes more than the expected time, it defeats the purpose of being realistic in the desired timeline.

T - Time-bound

A time-bound or timely goal means it has to have a start and finish date. If there is no end time, then there will be no sense of urgency and less motivation to achieve the goal.

Samarth has time till the end of next year to raise enough money to purchase a bike. It helps define what instruments Samarth can invest in and how much he should have at the end of the desired time period.

Like setting metrics, having a fixed time frame will help organise the right moves to achieve the goal.

The bottom line

Setting SMART goals is a more practical and proven method of achieving your goals. It changes the mindset from “I want to” to “I’m going to, " which is more action-oriented. Setting vague and unclear goals is bound for failure with no sense of direction and urgency.

Related Posts