How SMART Is Your Approach To Personal Finance?

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There is a case to be made that emotion accounts for too much of our approach to personal finance. When things are going well, we’re happy. When things aren’t looking so good, we’re sad. We’re human beings, so it’s to be expected, but it’s always worth remembering that people are flawed, and prone to making mistakes when emotion plays too big a role. It’s emotion, not rationality, that might make us overspend on a home, or treat ourselves to something we want even when we’re hurting our finances in the process. Business, however, is not an emotional enterprise: it’s based on what works, and what doesn’t. A company that ran on emotion would not be around very long. So how we can apply a business approach to our own finances? By being smart.

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The Approach

If you’ve ever worked in a business environment, you’ll have heard of the SMART acronym. It’s applied to a lot of business factors, be it employee management, project management, or targets for the forthcoming year. It’s not a defined approach: it’s a guide that people keep in mind when they’re trying to improve. The acronym stands for specific, measurable, achievable, reasonable, and tracking (or a variation of these words), and adopting the approach might just guide you to a more financially sound future. Let’s take a look how.

Specific

Everybody wants to improve their financial situation, but there’s no one right approach. Everyone’s circumstances are different. Wanting to have enough money to retire at fifty is much different from wanting to get rid of the debt that is dragging your finances down. Whatever it is, the important thing is to be specific when it comes to setting your goal. Instead of focusing on generally improving your financial standing, pick one area that you want (or need) to improve, and create a plan based on that, putting the other factors to the back of your mind for the time being.

Measurable

The goal can be pretty vague (for example, “I want to buy a house“). The measurable aspect of SMART is setting a target that can show whether it has been successful or not. For example, if you want to save money for a mortgage, you might say to yourself: I will save $10,000 by the beginning of next year. That’s something that is clearly defined, and you’ll know whether you’ve achieved it or not. It’s about setting a target where there are no blurred lines. A general ambition (“save money for house”) will leave you nowhere. You’ll save some money, for sure, but it won’t be goal-orientated, and it’ll be easy to settle for less than you need.

Achievable

Once you’ve decided your target, you’ll need to make sure that it’s achievable. As in, making sure it’s actually possible to do. This is where a bit of research will go a long way. If you are $10,000 in debt, you’ll want to pay it off as soon as possible, but wanting and being able to are two different things. Before you set this target, you should get debt counseling and advice from certified counselors to determine how much you need to pay; if you can improve your debt standing; and how to factor in your other expenses while also paying off your debt. If you’re just trying to raise money, then analysing your income v expenses will give you an idea of how much it is achievable to save.

Reasonable

You know what can be achieved, but are you in a position to achieve it? Let’s take a look at the debt again. If you have $10,000 worth of debt and figure out that it’s possible to pay off $1000 a month, then that might be achievable, but is it realistic? If you’ve just had another child or there are some expenses that you could but shouldn’t cut, then it won’t be realistic. When setting a goal, it’s important that it won’t negatively impact other areas of your life: if it does, it’s much more likely that you will cut the goal before you have success.

Tracking

You need to have a deadline for your goal. If it’s open-ended, you’ll likely fail before it has been achieved. Set a deadline for your goal, or objectives along the way (for example, “I will reduce my debt by a third in 8 months”), and make sure that you’re reviewing and keeping track of the status of your goal as you go along.

There’s much from the business world that we can incorporate into our personal finances to make them more robust, and less emotional.

 

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