Set­ting SMART fi­nan­cial goals

The Citizen (KZN) - - Business - Karen du Toit

In­vestors can make use of the pop­u­lar acro­nym SMART to set goals that fo­cus one’s ef­forts and in­crease the chances of suc­cess. SMART goals are spe­cific, mea­sur­able, achiev­able, rel­e­vant and time-bound.

We are more likely to achieve goals that are ex­pressed un­am­bigu­ously, within reach and realistica­lly achiev­able.

Goals should be at­tain­able yet chal­leng­ing. We should set spe­cific cri­te­ria to mon­i­tor goal progress within a de­fined time­line. Their ab­sence makes res­o­lu­tions look more like wishes than goals.

Fi­nan­cial goals should also fol­low the SMART frame­work.

For ex­am­ple, your fi­nan­cial goal might be a com­fort­able re­tire­ment 35 years hence. You could tar­get a pen­sion or an­nu­ity amount­ing to three-quar­ters of your fi­nal salary and you would want to sus­tain pur­chas­ing power for your rea­son­able life ex­pectancy.

Here we have a rel­e­vant, spe­cific goal with a time­line. The goal is read­ily achiev­able if you have al­ready started an in­vest­ment pro­gramme, sav­ing enough in a high eq­uity multi-as­set fund with a long-term in­vest­ment hori­zon.

A qual­i­fied fi­nan­cial ad­vi­sor can help you with the cal­cu­la­tions, con­sid­er­ing your cur­rent in­vest­ments, in­come and ex­pen­di­tures. You can ap­prox­i­mate your life ex­pectancy, but we are all liv­ing longer and we should plan to re­tire later than past gen­er­a­tions.

It is also im­por­tant to mon­i­tor progress reg­u­larly. As­sess your fund’s per­for­mance over much longer pe­ri­ods, from five to 10 years. Do not make changes to a port­fo­lio based on short-term per­for­mance.

I would also sug­gest you do not com­pare your re­turns to those of friends or fam­ily. As with weight loss or fit­ness, com­par­ing progress may af­fect your mo­ti­va­tion.

If your goal is to fit into size 10 pants when you wear a size 16, your jour­ney and time­line will look dif­fer­ent to some­one who is also tar­get­ing a size 10 but wears a size 12.

So it is with in­vest­ments. The process, risk and time hori­zon of other peo­ple’s in­vest­ment funds may be dif­fer­ent to, and con­flict with, your own goals and plan.

Within a longer-term fi­nan­cial plan, there may also be medium and short-term goals. For ex­am­ple, pay­ing off a house or sav­ing for a child’s ed­u­ca­tion. Th­ese goals need their own time­line to be­come SMART goals. You should de­velop de­tailed strate­gies to achieve them.

Un­re­al­is­tic and un­achiev­able fi­nan­cial goals may pro­duce un­re­al­is­tic re­turn ex­pec­ta­tions. Th­ese may lure you into prod­ucts that prom­ise re­turns far above what a pru­den­tial in­vest­ment port­fo­lio can prac­ti­cally de­liver. In this case, heed the adage: “If it sounds too good to be true, it prob­a­bly is.”

Karen du Toit is with Fo­ord As­set Man­age­ment

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