Essential Guide to Better Money Habits
Our lives are a product of our daily habits. Our bank balances, level of debts, net worth, income, health and happiness are the result of the unconscious routines that we engage in each day from the moment we wake up. Habits may serve you or they may not. It depends on whether you’ve developed better money habits.
While it may feel like we’re constantly making decisions, we’re not. It’s estimated that we’re running on autopilot around 40% of the time.
This is generally a good thing. Imagine the amount of brain power you would use up each day if you had to think through making a morning coffee, having a shower, brushing your teeth and commuting to work before your day even begins.
Good habits serve to create order, routine and efficiency. They simplify our lives in a positive way.
While individual habits don’t matter much on their own, over time they add up to create the picture of our lives. Each time we save or spend, exercise or don’t, work longer hours or organise our time one way or another we determine our financial situation, health and happiness over time.
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How your good money habits determine your wealth
If you want to become rich, that’s an outcome. In order to achieve it, you need to engage in a set of behaviours that will get you there. Seeing as such a large portion of our lives is driven by habits, it’s your bad or good money habits that make you rich or don’t.
Your lifestyle, at its current cost, is made up a series of habits. Spend money on lunch and coffee each day? That’s a habit. Treat yourself to a new outfit you really love? Also a habit. Go window shopping when you’re down or for something to do; browse online stores after work to unwind; meet up with friends for breakfast every weekend; buy on credit card if you don’t have enough cash? All of these are money habits.
And all of these over time determine your bank balance and net worth if you’re spending more and saving less than you’d like.
Have you ever wondered how some people manage their money with effortless ease? They don’t seem to give into temptation, their net worth keeps growing, and they easily live below their means.
This way of managing money runs counter to the conventional wisdom of budgeting each month, tracking everything you spend and cutting expenses. Yet, I’ve noticed a few bloggers recently allude to this ease.
Mr Money Moustache is no longer interested in keeping track of his spending because it doesn’t serve him. Cait Flanders has adopted a mindful approach to her personal finances.
I’m sure there are many more great examples based on comments I’ve seen – feel free to out yourself if you’re one of them.
What’s the commonality? I’d wager its good financial habits. When your saving and spending behaviours are on auto-pilot, managing your money becomes effortless and predictable.
That doesn’t mean a set and forget approach with your finances. It means avoiding the need to rely on your willpower to ‘be good with your money’. Your good money habits ensure that you get all the rewards you need despite living below your means.
For example trying to save money is based on cutting back expenses and therefore not getting what you desire. This causes a mental resistance which is what makes it hard. Once good money habits are formed, the resistance is gone and you just do it.
When that happens, you save more money, more easily and quickly. It’s a self-perpetuating system that works in your favour to increase your level of wealth.
Why Deciding To Change Habits Isn’t Enough
Behaviour patterns literally become etched into our brains via our neural pathways, reinforcing and maintaining our behaviour. Habits are formed through repetition and the brain is able to overwrite our old patterns with new ones.
Rich habits are developed slowly. They’re like memories that are written in response to an experience of a particular context, cue and response. We’re rarely even aware of these habit memories that guide our actions, even if they are in conflict with our goals and intentions.
While our intentions and beliefs can change quickly, changing habits is a slow process of teaching the brain to respond a new way in a given situation.
This explains why you can get all fired up to change, feel a burning passion to get the job done and then revert to the old habit at the first opportunity.
Good intentions, on their own don’t lead to change.
The 21 Day to a New Habit Myth
It sounds so appealing doesn’t it? Just stick to a behaviour for 21 days and a new habit will be formed. Unfortunately it doesn’t work that way. The myth is based on a misinterpretation of Dr. Maxwell Maltz’s work on self-image from the 1960’s.
According to a 2009 study, it’s not clear how long it will take.
Thanks science, very helpful as always.
Researchers from University College London studied new habits of 96 people over the space of 12 weeks. They found that the average time it takes for a new habit to stick is actually 66 days. But actual individual times varied from 18 to a massive 254 days.
What this means is that it can take a long time to form a new habit and realistically you should give it at least 2-3 months before expecting to notice a change.
On the bright side, the researchers did find that missing one opportunity to perform the new habit didn’t really affect the habit formation process. This means that a stuff up one day, doesn’t send you back to square one.
Changing Bad Habits or Creating Better Money Habits
In “The Power of Habit“, Charles Duhigg explains the habit loop which consists of three elements:
- The Cue: A situational trigger that’s based on a reward you want.
- The Routine: A physical or emotional action you take to get the reward.
- The Reward: The satisfaction you seek by following the routine.
In order to conserve mental power, our brains are only active during the beginning and the end of the loop. When we experience the cue, our brain figures out if it’s time to run a particular habit script and which one to use. It’s why you can remember getting in the car and then finding a parking spot at the end of your trip, but the rest of your commute is a blur. Your mind went elsewhere when the basal ganglia – the bit of your brain that maintains your habits – took over.
If you want to change a habit, you need to disrupt the cycle. Duhigg explains that:
“To change a habit, you must keep the old cue, and deliver the old reward, but insert a new routine.”
Let’s say you’ve decided you want to save an emergency fund and you’re competing with a friend. But each evening while surfing the web you find yourself clicking over to your favourite deals website and browsing. Sometimes you just look, other times you snag a great bargain.
Except your friend is winning the challenge and at this rate, you’re going to be walking their dog for the next month. The habit is browsing deals, the cue is surfing the internet, what is the reward?
To make a change that’s what you need to figure out.
1. Where Mindfulness Plays Its Part in Better Money Habits
Mindfulness is all the rage these days. But with all this discussion of habits and the fact we spend 40% of our time on autopilot, the Yogi or Tony Robbins in you has to wonder where awareness actually plays a role in to your life.
When the cue preceding a habit comes along, it’s time to apply mindfulness. This is the part where you cultivate self-awareness so that you can make smart choices with your money.
- It’s 9:15am which means it’s coffee time!
- Your alarm clock goes off at 5am because you want a little time to work on your side gig, but right now you just want to press snooze.
- You feel like getting out of the house for a while and decide to wander down to the shopping centre.
- Another reminder about setting up a retirement savings account hits your inbox. You’ll have to do that later.
These are all cues for habits that potentially cause you to spend more, make you less productive or less prepared for retirement.
You can use mindfulness to:
- Firstly notice the cues that prompt a given habit. For example, what time is it? Where are you? Who else is around?
- Then understand why you do what you do in response to the cue. What’s the reward? How does it fulfil your needs?
- Once you come up with a theory on your motivation, test it. Was that the real reward or do you still feel unsatisfied?
Unfortunately, you’re on your own here. Only you can begin to understand what drives you to take a particular course of action. But to help, here’s a nice flowchart of the process from “The Power of Habit” blog by Charles Duhigg.
2. Changing habits, or Creating New Ones
Once you understand your cues and rewards, you can substitute the current routine with a new routine. Alternatively if you’re looking to start a new habit, pick a cue and a reward and add the routine.
To change a bad habit, it would look like this:
When [Cue], I will [Routine] because it provides me with [Reward].
For a new habit, it would look like this:
When [Cue], I will [Routine] in order to get [Reward].
Bonus points for actually writing this down, because science says it’s more effective when you do.
Sounds easy right? Well, yes and no.
3. Start small when Changing Habits
Taking action on a new routine isn’t that straightforward, because we’re all human. According to BJ Fogg, there are three things that need to happen at the same time to change behaviour.
First you need to have some motivation. You have to want to save. Next you need to have the ability to do it and finally you need the trigger. Fogg has a graph with the motivation versus ability continuum with a line that denotes the activation threshold.
Essentially, for you to act on your new routine, you need to be sufficiently motivated to do an action that is easy enough. Harder to do actions will take more motivation while easier to do ones will need less.
Motivation is great for achieving hard things, but relying on it to instil a habit it unlikely to lead to success as habit change relies on repetition. For example, I can tell you to start saving 50% of your income from tomorrow. If you don’t have an excellent savings habit, that’s hard to do and even if you’re super motivated initially, it will wear off quickly.
If I tell you to save a dollar every day for the next year, that’s pretty easy to do, but you probably won’t have enough motivation to do it.
So what you’re looking for is a routine that you have enough motivation to accomplish, but that is easy enough to do that you will actually do them over several months.
This is the premise behind the FREE Tiny Habits program he developed.
4. Make Incremental Changes
You feel enlightened and you’re ready to make big changes. You imagine your perfect life and decide that from Monday, you’re going to live it. THIS. IS. IT.
In my experience, trying to change everything at once is the fastest route to failure, because there is so much resistance. Your perfect life is built through a series of habit changes done one at a time.
In fact, apparently research shows that when people change a single behaviour at a time, the likelihood they’ll retain that habit for a year or more is more than 80%. By trying to change two behaviours at once, the change of success drops below 35%. At three or more habits, the success rate plummets to below 5%.
The power of habits lies in making small incremental changes. The aim is to approach your habit change in a reliable way, one that won’t regress.
If you take a small action today and tomorrow, in a years’ time it will lead to big change. If you’re discouraged by how small the action is and how slow your progress will be so you don’t even try, in a years’ time, nothing will have changed and you’ll be wishing you just took that small action.
And besides, there’s always the Domino Effect to snowball your progress. Who knew humans could be so complicated right?
5. Harnessing the Domino Effect
The Domino Effect is based on the theory that all your habits are highly interconnected and you can create a chain reaction of good habits. This means that when you change one small little thing, like making your bed, it has an effect on all your other habits. Which means, a decision in one area of your life has a knock on effect in other areas.
Say you decide to take lunch with you to work tomorrow. You pack something tasty, save $10 and feel pretty good. For the next few days you keep taking your lunch in and then on the fourth day you decide to take a walk around the block at lunchtime. You never planned to go for a walk, it just felt like a good idea. Then you think, maybe you could cycle to work one day a week. So you try that and before you know it, not only are you saving money you’re also eating better and getting fitter.
That’s the power of the Domino Effect. You’d be surprised where making one small achievable change can take you.
Harness the momentum – if you feel like doing a second positive behaviour just after your first habit, then go for it.
6. Be Patient With Yourself
Finally, be patient with yourself. Know that you will fall of the wagon. Changing habits is hard. When something derails you, don’t fall into the trap of calling yourself names or labeling yourself. You’re not a failure etc. Get back up and pick up where you left off. Be kind to yourself.
Transforming your financial habits is neither quick nor easy. But it is possible. Just look at Leo Babauta.
Are you working to change any habits at the moment? What tools or strategies have you used to change in the past? Are you managing your finances with effortless ease these days?
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