I recently read Charles Duhig’s The Power of Habit and it really got me thinking about how habits form and why we do the things we do. The biggest lesson I took away from the book is that habits can be learned and changed. By recognizing how habits form, we have the power to change how we behave. We conduct many aspects of our lives based on habit. From mindless snacking, smoking, to checking our phones first thing in the morning, those are all habits. If you’re not happy with how those habits affect your life, you have the power to change.
Not all habits are negative. Brushing your teeth, maintaining a clean living space, and exercising are all considered positive habits. Just like you can learn to get rid of negative habits, you can also learn to adopt positive habits. This knowledge is especially helpful when it comes to managing our finances. Many of us have poor habits when it comes to our money. Ignoring bills, not following budgets, or spending out of boredom are all poor financial habits that can wreak havoc on our finances. Fortunately, you can break out of that cycle and learn to adopt positive habits. Here’s how changing your habits can improve your finances.
Learning how habits form is the key to stopping bad habits from forming. Charles Duhig writes in his book that certain cues trigger our habits and recognizing those triggers can help us reform our habits. In his book, Duhig uses the example of turning to food when you’re bored. In the example, boredom is the trigger.
In the realm of personal finance, being able to recognize the trigger that causes us to overspend can help us rein in our spending. For example, some of us shop in response to certain emotions. We may shop when we’re stressed, sad, angry, or bored. By tracking our spending habits and recognizing what causes us to spend, we can learn to respond to our emotions in a different manner and you can learn to improve your finances.
We can choose to exercise, read a book, cook, catch up with friends or a host of other activities that don’t involve spending money. The key is to identify your triggers. I’m someone who likes to spend money when I’m in a good mood. It’s like I want to celebrate my good mood. When I receive good news or have a good work week, my instinct is to dine out at a restaurant and reward myself. Having realized that my underlying desire is to treat myself, I change the treat from eating out to an hour of uninterrupted TV time. They both make me happy but one costs way less money than the other.
Focus on One Habit
When we’re making changes in our lives, it’s tempting to try to start with a blank slate and just change everything. The trouble is, you’re diluting your focus and resources. I agree with Duhig who says in his book that you should focus on one habit at a time. When you’re making 5 different changes and succeed with only 1, it can feel very discouraging. Worse yet, you might have a hard time sticking to any of the habits you’re trying to establish.
On the other hand, if you devote all of your energy to 1 habit and commit to making it work, success will feel really rewarding. Not only that, you have a better chance of succeeding because you can direct all of your focus towards that 1 thing. Improve your finances one habit at a time, you don’t have to make a million changes all at once.
We love aiming for big goals and big wins because it can feel very rewarding. However, don’t ignore the small wins. They can help us feel like we’re on the right track and give us the motivation to keep going. You can start with something simple like aiming to check your bank account once a week. Or, you can involve your family and have a family financial meeting every week.
On the surface, these seem like small things that don’t matter but by starting small, you build up your confidence and it’s the start of a great foundation. Once you’ve mastered the basics, you can move on to more difficult matters.
Duhig defines keystone habits as habits that can create chain reactions and lead to a bunch of good results. For example, let’s say that getting 8 hours of sleep is a keystone habit. By getting a full night’s rest, you’ll likely be more productive because you can concentrate. You spend less money on coffee because you don’t need caffeine to perk you up. Your relationships improve because you’re more patient and are happier when well-rested. This one keystone habit sets off a host of positive results.
Similarly, establishing a keystone habit in your financial life can also trigger a chain of positive results. I make paying myself first my keystone habit. Out of every paycheck, I skim off a portion to put in my online bank account. Before I pay the bills, before I go shopping, before I do anything else, I pay myself first. This results in a healthy emergency fund. I have money to invest and put in my Roth IRA. I also receive intangible benefits in that I can sleep easier at night because I don’t have to worry about money. Find your keystone habit, and you’ll be amazed by the wonderful chain reaction it can set off.
Find Like-Minded People
Finding like-minded people on your financial journey can be incredibly helpful. These might be people who share the same goals you do or face the same struggles. Finding similarly situated people is beneficial because you’ll be empathetic to each other’ situations and can genuinely support each other.
Sometimes, we may find it embarrassing to tell a successful friend that we struggle with money. We may not want to admit to coworkers that we don’t make as much money as we feel like we should. I only tend to discuss finances with a specific group of friends because we’re similarly obsessed with financial independence. Not all of my friends can handle my compulsive interest with money, so I’m glad that I do have a smaller group of peeps I can talk to.
Have a Plan
Habits can’t take shape haphazardly, you need to have a plan. We’re more likely to stick to something and develop a habit if we make it a routine. People who exercise regularly tend to do it at the same time every day. They plan out the types of exercises they’re going to do, and they know how long they’ll be working out. Likewise, when you are trying to establish good financial habits, it’s wise to have a plan.
If you want to set up an emergency fund, have a plan for how you’ll get there. How much do you need to save and where will the savings come from? What do you need to do day in and day out to make that happen? You can’t just think about what you want to accomplish. To improve your finances, you need to have a plan.
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Do you have any financial habits? What are they and how did you establish those habits?