In personal development, SMART is an acronym that describes how to set goals and objectives to achieve better results. The SMART criteria were first proposed in the November 1981 issue of Management Review by George T. Doran. SMART means specific, measurable, attainable, relevant, and time-bound. As you may have noticed already, in budgeting, you have to set goals as well to achieve better results. In this article, we will try to explore how well this SMART roadmap applies to budgeting and how to leverage it to get the best results.
Understanding the meaning of each letter from the SMART acronym:
- Specific goals are those that are clearly defined and easy to understand.
- Measurable goals are those that can be quantified and tracked.
- Achievable goals are those that are realistic and attainable.
- Relevant goals are those that are aligned with your larger objectives.
- Time-bound goals are those that have a specific timeline for completion.
Here is an example of what a SMART budgeting goal looks like:
| SMART Goal Steps | Questions to ask: | Example: |
| S = Specific | What is the main purpose? | Build an emergency fund |
| M = Measurable | How much to save? | $500 |
| A = Attainable | Can I do it? | Yes, if I don’t go out to eat. |
| R = Relevant | Is this really important? | Yes, anxiety levels will drop |
| T = Time-bound | When will I finish saving? | In 4 weeks. |
And now, let’s break down each step so you can understand it better and replicate it when you do budget planning.
What does “specific” mean when you do SMART budgeting?
When you are specific, you leave no room for error. Being specific means providing as much detail as possible when describing your goal. This can include specifying things like quantity, location, values, or any other relevant information. When you are specific, it means that you provide enough details so there is no room for interpretation.
A few examples of goals that are very specific:
- You want to pay out $10,000 in debt
- You want to put $1,000 in an emergency fund
- You want to buy a laptop so you can work in your spare time
- You want to earn an extra $500 per month from a side hustle
- You want to travel to Hawaii for two weeks next year
- You want to buy a $500 present for your wife’s anniversary
- You want to change the furniture in your kitchen
Vague goals are not ideal because they can lead to a sense of aimlessness. It can be easy to become bogged down or sidetracked if you don’t have a specific goal to focus on. This can lead to wasted time and effort and, ultimately, a sense of disappointment. When you have a clear goal in mind, it is easier to get excited about working towards it. With a vague goal, it can be harder to muster up the same level of enthusiasm and commitment.
What does “measurable” mean when you do SMART budgeting?
Measurable goals are those which can be observed and/or measured. In other words, measurable goals help you to stay on track, measure your progress, and see the results of your efforts. For instance, a goal to “lose weight” is not measurable, but a goal to “lose 10 pounds in 5 months” is. Measurable goals are important because they provide a way to track progress and gauge whether or not you are on track to reach your objectives.
Measuring results is important because it allows you to track your progress and determine whether or not your efforts are paying off. Without measuring results, it would be difficult to know if you are making any progress at all. If you’re not measuring results, you could be wasting a lot of time and energy on something that isn’t actually accomplishing anything.
On the other hand, measuring results allows you to adjust your approach as necessary. If you’re not seeing the desired results, you can make changes to try to improve things. This could involve changing your strategy, altering your tactics, or trying something completely different.
Results provide motivation. When you see that your efforts are having an impact, it’s much easier to stay motivated and keep working towards your goals.
What does “achievable” mean when you do SMART budgeting?
An achievable result is something that can be attained through effort and planning. It is something that is realistic and within reach. An achievable result is something that you can work towards and accomplish.
To understand better what achievable means, I will give you some examples of what achievable is not:
- Getting world champion at chess if you have already bypassed a certain age (meaning you are not very young) and you are just starting to learn
- Becoming a wealthy person overnight
- Becoming famous without putting in any effort
- Losing a significant amount of weight without making any lifestyle changes.
While these goals may be admirable, they are also unattainable for most people. These types of goals are often based on luck or chance rather than hard work and dedication and, as such, are unlikely to be achieved. The vast majority of people will never become wealthy beyond their wildest dreams, or famous, or perfect. That doesn’t mean you shouldn’t strive to be the best you can be, but it’s important to keep your goals realistic.
What does “Relevant goals” mean when you do SMART budgeting?
An aim that is relevant connects with all aspects of your life, including your job, relationships, and desires. Inconsistent or scattered objectives are the opposite of relevant objectives. An objective that is relevant ensures that the objective is aligned with your bigger picture and vision. There’s not much more that can be said about relevancy. Just target something that is not too far away from your current interests and skills. Don’t set a goal just because other people think it’s cool or because it’s trendy.
What does “Time-bound” mean when you do SMART budgeting?
This is pretty simple and straightforward. A time-bound goal is a goal that has a deadline attached to it. This could be a daily, weekly, monthly, or yearly goal. It also can be a particular date, like Christmas, August 15th, or January 1st. The point is that it has a specific timeline attached to it so that you can measure your progress. This is often used in project management to ensure that a project is completed within a certain timeframe, and it can be used as well in budget planning for the same reason. This can either be self-imposed, as in the case of a personal goal, or imposed by someone else, as in the case of a work deadline. Having a time-bound goal helps to increase focus and motivation, as it provides a clear target to work towards.
The benefits of SMART budgeting:
Budget planning offers numerous advantages, including improved financial awareness by integrating income and expenses into a comprehensive plan, fostering accountability, and identifying underlying financial issues. It enhances future preparedness for unexpected expenses, reduces financial stress by providing a clearer understanding of financial capabilities, and aids in effective debt management. Additionally, budgeting supports making informed decisions on borrowing, facilitated by regular savings for essential expenditures.
Practical tips on SMART budgeting:
Short-term vs long-term goals
It is important to distinguish between short-term and long-term goals because it helps you prioritize your actions and allocate resources effectively. Short-term goals are achievable in the near future and often serve as stepping stones towards long-term goals, which are broader and achieved over a longer period. In practice, for instance, a short-term goal might be saving $500 in three months for a new phone. This is specific, measurable, and has a clear deadline. A long-term goal, in contrast, could be saving for retirement. This goal spans years and requires a different strategy, like regular contributions to a retirement account. By separating these two goals, you can create a balanced approach that addresses immediate needs while working towards your future aspirations.
Track your income and expenses
Tracking your expenses is crucial in budgeting because it lets you understand where your money is going. This understanding is key to making informed decisions about where to cut costs or allocate more funds. In practice, you can start by recording all your expenses for a month. For example, keep a daily spending log, including groceries, utilities, and leisure activities. At the end of the month, categorize these expenses (like food, rent, entertainment). This will give you a clear picture of your spending patterns, helping you identify areas where you can save and better align your spending with your financial goals.
Additionally, utilizing budgeting apps like RocketMoney or Acorns can streamline the process of tracking your expenses. In this review of Rocket Money, you’ll find that it’s helpful and easy to trust. It automatically categorizes your expenses, providing clear insights into your spending patterns. This understanding is crucial for effective budget planning. The best physical budget planners might be a suitable alternative for a more tactile approach. Additionally, an honest review of Acorns shows its efficacy in micro-investing, offering a different yet efficient way to manage finances. Using tools like Rocket Money or Acorns can significantly streamline your budgeting process, enabling you to effortlessly monitor financial activities and align them with your financial goals.
Separate fixed from variable expenses
Separating fixed and variable incomes is important in budgeting because it helps accurately forecast your financial situation. Like a regular salary, fixed income is predictable and stable, whereas variable income, such as freelance earnings, can fluctuate. In practice, let’s say you earn $3,000 monthly from a fixed job and around $500 to $1,000 from freelance work. In your budget, allocate essential expenses (rent, utilities) against your fixed income, ensuring stability. Then, use your variable income for savings or discretionary spending. This separation allows for better financial planning and minimizes the risk of overspending. For more detailed strategies on budgeting with an inconsistent income, consider reading the article “How to Budget on an Inconsistent Income,”. which offers comprehensive guidance tailored to managing finances with variable earnings.
The 50/30/20 rule
The 50/30/20 rule is a simple budgeting technique that allocates your after-tax income into three categories: 50% for needs, 30% for wants, and 20% for savings or debt repayment. For example, if your monthly take-home pay is $3,000, under this rule, you’d allocate $1,500 for necessities like rent and groceries, $900 for wants such as dining out or hobbies, and $600 for savings or paying off debt. distinguishing between ‘needs’ and ‘wants’ is crucial. Needs are expenses that are necessary for your survival and well-being, such as housing, food, healthcare, and transportation. Conversely, ants are non-essential expenditures that enhance your lifestyle, like entertainment, dining out, and luxury items. A good resource for more in-depth information on this rule and how to apply it effectively is the book “All Your Worth: The Ultimate Lifetime Money Plan” by Elizabeth Warren and Amelia Warren Tyagi, where this concept was popularized.
Zero-based budgeting
Zero-based budgeting allows you to allocate every dollar of your income to specific expenses, savings, or debt payments so that your income minus your expenditures equals zero. For example, if your monthly income is $3,000, you would allocate funds to all your expenses, savings, and debt until you have zero dollars unassigned. This might mean $1,000 for rent, $500 for groceries, $200 for utilities, $200 for transport, $600 for savings, and $500 for debt repayment. For a comprehensive understanding of zero-based budgeting, the book “The Total Money Makeover” by Dave Ramsey is a highly recommended resource. Ramsey offers a detailed explanation and practical tips on implementing this budgeting method.
Evaluate your spending habits
Evaluating your spending in the context of budgeting means analyzing where your money goes and determining if it aligns with your financial goals and priorities. To do this in practice, track all your monthly expenses, categorize them (like rent, groceries, entertainment), and then review these categories to see if any adjustments are needed. For instance, if you’re spending $300 on dining out, you might reduce it to $200 and redirect the $100 to savings. For a detailed guide on evaluating spending and budgeting, “Your Money or Your Life” by Vicki Robin and Joe Dominguez offers comprehensive strategies and real-life examples to improve your financial habits.
Use a budget spreadsheet
A budget spreadsheet is a tool used to organize and track income, expenses, and savings. It typically includes columns for different spending categories and rows for each month or pay period. In practice, you’d create a spreadsheet with columns for categories like rent, groceries, utilities, entertainment, and savings. Each row would represent a month, where you’d input how much you spend in each category. For instance, if your monthly income is $3,000, you might allocate $1,000 for rent, $500 for groceries, etc., and track actual spending against these amounts. When choosing between a budget spreadsheet and budgeting apps, weighing their pros and cons is important. Spreadsheets offer detailed control and customization of your financial data, while budgeting apps provide ease of use, automation, and real-time financial insights. Your choice should align with your preference for either a manual, detailed approach or an automated, streamlined process. For a detailed comparison and insights on the advantages and drawbacks of each method, you can check this article “Budgeting Apps vs. Spreadsheets: Pros and Cons for Both“.
Prioritize paying down debt
This means you should try to allocate a significant portion of your income to reduce and eventually eliminate debts. It is often done by identifying high-interest debts and paying more than the minimum due on them each month. For example, let’s say you have a monthly income of $3,000. Your budget includes various expenses, and you have two key debts: a credit card debt of $5,000 with a 15% interest rate and a car loan of $10,000 with a 6% interest rate. In prioritizing debt repayment, you would allocate more funds to the credit card debt due to its higher interest rate, perhaps $500 per month, while continuing to pay the minimum amount, say $200, on the car loan. This strategy focuses on reducing the higher-interest debt more quickly, ultimately saving you money on interest charges over time.
Have a contingency plan
Having a contingency plan in the context of budgeting means preparing for unexpected financial events or emergencies. This typically involves setting aside funds in an easily accessible savings account. For example, after budgeting for all your monthly expenses, you decide to put aside $200 each month into an emergency fund. This fund is used only for unforeseen expenses, like medical emergencies or sudden car repairs. Over time, this dedicated savings acts as a financial cushion, ensuring you’re prepared for unexpected costs without disrupting your regular budget or falling into debt.
Use cash
This refers to the practice of using physical currency for transactions instead of credit or debit cards. This method helps control spending by making the act of parting with money more tangible. For instance, if you allocate $300 for groceries each month, you withdraw this amount in cash at the start of the month. When you use cash, you can physically see the money leaving your hand, which often makes you more mindful of your spending. One advantage of this approach is it helps avoid overspending, as once the cash is gone, you can’t spend more than you’ve planned. Compared to using credit cards, the cash-only method in budgeting offers a more disciplined approach to spending. Credit cards, while convenient, can make it easy to overspend and accumulate debt due to their “invisible” nature of transactions. In contrast, using cash imposes a natural limit on your spending. When the cash is depleted, it acts as an immediate signal to stop spending, unlike credit cards which allow continued spending beyond your budget. This physical interaction with money can lead to more thoughtful spending decisions and better financial discipline.
Do the budget together
Involve all relevant parties, such as family members or a partner, in the process of creating and managing a budget. This approach ensures everyone’s needs and goals are considered, leading to a more comprehensive and realistic budget. By involving family members, especially in decision-making, you can foster a sense of shared responsibility and cooperation. Moreover, having an “accountability partner” within the family can be beneficial. This person can help keep track of spending, remind others of the budget limits, and support sticking to the financial plan. This collective approach promotes transparency and mutual understanding and strengthens financial discipline among all family members.
Plan for large purchases
To plan for large purchases, set a clear savings goal for the item. Then, break down the total cost into manageable monthly or weekly savings targets. For example, if you want to buy a $1,200 laptop in a year, divide the total cost by 12 months. You’ll need to save $100 per month. Adjust your budget to accommodate this savings goal, perhaps by reducing discretionary spending or finding additional income sources. This methodical approach ensures you can make the purchase without financial strain or incurring debt.
Expect the unexpected
In budgeting, this means being prepared for unforeseen expenses. These can include:
- Emergency medical bills.
- Sudden car repairs.
- Home maintenance issues, like a leaking roof.
- Job loss or reduced income.
- Unexpected travel, such as for a family emergency.
To prepare for these, create an emergency fund for your budget. Ideally, This fund should cover 3-6 months of living expenses and be used only for emergencies. Regularly contribute to this fund to ensure you have a financial safety net for these unpredictable situations.
Don’t be too hard on yourself
The effect of being too harsh on yourself for budgeting slip-ups can lead to discouragement and potentially abandoning your budgeting efforts altogether. It’s important to avoid this because a flexible and forgiving approach allows you to learn from your mistakes, adjust your budget as needed, and stay committed to your financial goals without undue stress. Remember, budgeting is a tool for financial empowerment, not a source of constant pressure.
Conclusion:
While there are many good ways to set a budget, setting a SMART budget is one of the most effective ways to go. The beauty of the SMART budgeting model is that it works well both at the micro-level of monthly spending and the macro-level of your overall financial situation. The more you break down your spending, the more you can see where you can save money and what areas to focus on. Finally, set a time frame for your goals.
As you’re working on your budget, you’ll discover a lot about your spending habits and the areas where you can save money. You’ll also find out just how far you can stretch your money before you have to start cutting back. And now that you have a better idea of what each of the components of the SMART acronym means, go put it into practice!