I was recently reviewing my goals for 2014 to see where I’m going to finish for the year. I love setting personal and financial goals at the beginning of every year and then striving to meet them, following up with those goals throughout the course of the year to make sure I’m on track.
Although I’ve discussed goals on the site every year, I’ve never actually written about the methodology behind those goals and why it’s important.
So I’m going to share my view on how to set goals and why it’s important.
I’m a firm believer in following the SMART criteria when setting and achieving goals. This is a criteria that originated with a paper in the November 1981 issue of Management Review by George T. Doran.
There’s a lot of value in this system, as it helps anyone who applies it to formulate suitable goals.
There are a few different iterations of the SMART acronym and what each letter stands for. I’ll share with you my version and how I apply it to my own personal goals.
So the first letter – S – corresponds to Specific. You want to set a goal that’s specifically achievable, rather than just generalized.
This basically speaks to the framework of the goal. What do you want to achieve? For instance, setting a goal of “making more money” isn’t very specific. It’s a very general goal. How much more money? Where will the extra income come from? Is the goal going to be achieved through a raise at work or debt reduction? Some combination of both?
You could walk into your boss’s office and demand a raise. If he gives you a $1/year raise, you just achieved your goal. But did that really have any effect on your ability to build wealth? No. Make sure the goal is specific or you’ll just end up spinning your wheels.
The second letter – M – corresponds to Measurable. This means the goal must be able to be measured in some way. It should be quantifiable.
Relating to dividend income, setting a goal of achieving dividend income most certainly needs to be measurable. I set a goal at the beginning of the year to receive $5,200 in dividend income during the year. That’s measurable and quantifiable. I know exactly what’s necessary to attain my goal and I can easily measure my success throughout the year using hard numbers.
When setting goals, it’s extremely important that they be measurable. Otherwise, you’ll have no way to know if you achieved them or not.
A refers to Attainable. A goal should be based in reality.
It’s great to reach for the stars. I’ll never look down on someone who continually strives for the stars yet lands on the moon. After all, the moon is a lot further than most people get. Conversely, reaching for the ceiling of your apartment isn’t much of a stretch. However, it’s important that your goals be achievable. They need to be realistic. If I were to set a goal at the beginning of the year to receive $10,000 in dividend income throughout 2014, I would have failed before I even started. It’s great to stretch yourself, but you don’t want to constantly disappoint yourself either.
You also don’t want to make your goals so difficult that you end up causing long-term harm for short-term gain. For instance, don’t chase low-quality stocks with high yields just to make a short-term goal. Make sure your goals are challenging, but attainable. If not, you’ll be constantly letting yourself down. Be hard on yourself, but not impossible. It’s good to celebrate.
The fourth letter is R, for Relevant. Any goal you set should be results-oriented and relevant to your journey.
For instance, I could set a goal to be President of the United States by 40 years old. It’s certainly specific. But is it relevant? What does that have to do with becoming financially independent by 40? How will this goal help me achieve everything else related to my life?
Relevance is very important. I tend to keep my list of goals pretty short every year. Delving into everything and anything doesn’t help me stay focused. Relevancy is a great way to stay focused on what will ultimately propel you closer to what you really care about.
The final letter – T – corresponds to Time-bound. The goal should have a time limit set to it.
Relating back to my dividend income goal at the beginning of the year, I put a time limit on it. I put time limits on all of my goals, generally setting them at the beginning of the year so as to attempt to reach them by the end of the year. If I were to set a goal of receiving $5,200 in dividend income without any time stamp on it, how would I know if I’m being challenged? How would I know if I’m on pace for any larger, overarching goal? If I leisurely make my way to this goal by 2018, have I helped or hurt myself?
Being bound to a time period keeps you on task. It keeps you committed and held responsible.
You can see that every single goal I set at the beginning of the year is a SMART goal. Each goal is specific, measurable, attainable, relevant, and time-bound.
I first came into contact with the SMART system through my old position as a service advisor in the automotive industry. I regularly had to attend workshops related to my position, and this system was one of the few that I immediately identified with and found a lot of value in. It may sound corny, but it’s incredibly smart.
I implore anyone who regularly sets goals to abide by this system. It’s truly invaluable.
What do you think? Do you set SMART goals? Why or why not?
Thanks for reading.
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