What are SMART goals and why do they matter? | Financial goals | Financial Literacy | Khan Academy

So let's talk a little bit about smart goals when it comes to your finances.

When I say smart goals, I'm not just saying well-thought-out or intelligent goals, although I guess it could be that. I'm talking about the acronym S-M-A-R-T: smart goals. Now, the S stands for specific, the M stands for measurable, A stands for achievable, R stands for realistic, and T stands for time-based.

I think achievable and realistic are kind of common, but then it wouldn't be a fun acronym; it would be like smart goals or smart goals. So it's smart goals, which is a little bit easier to remember.

So what do we mean by smart goals? For me, it's easy to think about what it is by thinking about what it isn't. So let's think about what a non-smart goal would be when it comes to your finances. Let's say you just said, "I want to be rich." That is not a smart goal; that is not specific. It is not measurable. It might be achievable depending on how you think about what rich is, but once again we don't even know because you haven't quantified what that is. I have.

What does rich mean? It may be realistic, but we don't know, and the time—you haven't given any time there. So let's see if we can turn that into something more of a smart goal.

So let's first define what it means to be rich. Let's say you want, by the time you are 30 years old, to have enough money for a down payment on a pretty nice house. Let's say you want to have a hundred thousand-dollar down payment.

So let's see if that meets our smart goal. Is it specific? I want to save a hundred thousand dollars for a down payment on a house by the time I am 30 years old. That seems specific; it's a hundred thousand dollars for a down payment on a house.

Is it measurable? Yes, you can see how much money you have saved for that down payment and how close you are. Once you've saved ten thousand dollars in the first year, you're like, "Wow, I'm ten percent of the way to my goal!" The second year, if I've saved twenty thousand dollars, etc., you can measure how you're getting there.

Is it achievable and realistic? Well, depending on your financial circumstances, that seems doable for a lot of folks if they're able to save well. They might be able to save that amount, but once again, it depends on your income, your lifestyle, and your expenses. You have to make sure that's realistic. For some folks, that might not be achievable or realistic; for other folks, it might be very achievable and realistic.

And then, is it time-based? Well, yes, I just said, "By the time I am 30 years old." You could break that down; let's say you're 25 years old right now and you say, "Well, then I'm gonna have to save twenty thousand dollars a year for the next five years." So you could break that bigger smart goal into smaller smart goals.

Okay, this coming year, I need to save twenty thousand dollars towards my down payment on a house. Once again, it's specific, it's measurable. Depending on your scenario, it may or may not be achievable. If that twenty thousand dollars a year is just way too much and you're making, let's say, forty thousand dollars a year, you might say, "Okay, that's still not a smart goal; it's not necessarily achievable or realistic."

Maybe you have to moderate that a little bit and bring it down to five or ten thousand dollars, in which case maybe your larger goal is you're going to save fifty thousand dollars by the time you're 30, or you'll say, "I have to raise a hundred thousand by the time I'm 35."

What smart goals allow you to do is just realize whether you are achieving them and also have goals that are achievable in a very clear time frame. So smart goals are useful in practically anything you do, but especially when it comes to your finances because it's very easy to say, "Oh, well, I just want to do that. I want to be comfortable; I want to have enough money. I want to be rich," whatever you say.

But when you just say it in these kind of loosey-goosey terms, it's very hard to know whether you're making progress against those things, and because it's hard to know whether you're making progress, you oftentimes aren't holding yourself accountable.

And so smart goals are a smart thing to do.