Most people think of budgeting as a dirty word. It is the punishment you get for overspending, much as dieting is the punishment you get for over-eating. Rather than a punishment for past actions, your budget is really a plan for future spending. It is the road map that provides the directions you must follow to get from where you are today to where you want to be in the future.

Vanquish the dreaded "B" word from your vocabulary. Instead of budgeting, develop your plan for spending. For the spending plan to work, however, you first must decide where you want to go. If you were planning a vacation, you would not say you are going out west someplace. It might be nice to wander aimlessly westward until you found someplace worth stopping, but most people lack the time and money to make such an outing practical.

The more specific you can be about where you plan to go, how you plan to get there, when you plan to arrive, and what you hope to do when you arrive, the better your vacation will likely turn out. Setting SMART goals is the first step to planning for not just a family vacation, but also for your long-term financial security. SMART goals and the magic of compound interest can help you to arrive at your destination on time and with a minimum of difficulty.

What is a SMART goal?

A SMART goal is:

Specific - Exactly what it is that you want? The more detailed you can be, the better. Instead of saying you want a new house, be specific about the kind of house you want, the part of town you want to live in, the features and amenities it will include as well as things that would perhaps be nice extras. Instead of saying you want financial security, define what that would mean to you in specific terms. If you don't specify what it means to you to be financially secure, you will never know when you have reached it.

Measurable - Once you know what you want, you need to put a price on it. How much is it going to cost to get exactly what you want? For distant goals, have you considered increases in cost due to inflation? Whatever the goal, you need to come up with the specific dollar amount you need to achieve it.

Actionable - There need to be things you can do--steps you take-- to reach your goal. Can you afford the amount you will need to set aside each month to reach the goal? There may be other considerations as well.

Realistic - In addition to being actionable, your goals must also be realistic. Climbing the highest mountain in your area may be attainable—-others do it all the time. However, climbing mountains may not be realistic if you suffer from respiratory problems or other limitations. A goal to become a jockey in the horse racing world may not be attainable for someone built more for football or basketball.

Time-bound - When do you want to accomplish your goal? Be specific, like by November 30, 2018. With the deadline and the cost of your goal, you can calculate the amount you need to contribute each month to reach it. If you cannot afford the monthly contribution, you need to scale back your goal or back up the deadline date.

With goals more than a few years away, how you save can have a big impact on the amount you need to set back each month. The type of account you use and the annual return can have a huge impact on the amount you will need to save for your goal. On top of the interest rate, the longer you have to save for your goal, the less you need to contribute to reach it. Sound like magic? It is magic…the magic of compound interest.

Thanks to the magic of compound interest, if your goal is to save $15,000 in 15 years, you do not need to set aside $1000 each year (about $84 per month) unless you use a piggy bank and earn no interest. In a bank account, earning two percent interest you need save only $867 a year to reach your goal. Switch to a long-term Certificate of Deposit with a five percent Annual Percentage Yield, and you can reduce your annual contribution to $695. Invest in a mutual fund with an average annual return of nine percent and you need only contribute $511 a year to reach your goal-—just $39 per month. Have more than 15 years to save? Then you will benefit even more from the magic of compounding.

Setting goals for your long-term financial security is not an easy task. It can be difficult to think about the future realistically when there are so many unknowns. It is also challenging because most families need to work on multiple goals and keep up with routine, day-to-day expenses at the same time. At any given time you may also be saving for more immediate needs, like a new car or gifts for an upcoming birthday or special occasion.

That is why a plan for spending is so important. Your plan for spending is the road map to where you want to go. The farther your goals reach into the future, the more important it is to plan your spending so you can cash in on the magic of compound interest. Together, the spending plan and the magic of compound interest are the two most important tools in your financial toolbox.