Make money habits that stick
Key Takeaways
As mid-June approaches, 2019 is half over. The halfway point is an ideal time to check your progress on your New Year’s resolutions. You do remember those, right? Have you succeeded in creating any new habits?
Chances are, you made a money-related resolution. Maybe it was saving more for retirement, or squirreling away additional funds for your child’s college education. If you’re like most Americans, 80% of whom don’t follow through on New Year’s resolutions, you’re likely lagging on these lofty financial goals.
This begs two questions: Why are we so bad at achieving financial goals? And, what does it take to improve our success rate? Jame Clear’s latest book, Atomic Habits, has some answers. Without giving too much of Clear’s book away (it’s definitely worth reading), here are a few key takeaways you can apply to personal finance.
Think small
Many reading this will have the goal of financial independence. That is a lofty goal. In fact, goals generally tend to be enormous entities, Clear points out in his book. Paying off your mortgage early, making enough to buy a boat, or putting your kids through college are all fine goals, but simply setting those goals does little to help you achieve them.
Instead, Clear argues, it’s better to build sound habits. With good habits in place, financial goals, such as the ones mentioned in the paragraph above, take care of themselves. Instead of focusing on the end (goals), we should pay more attention to the process that gets us there (habits). Focusing on the habit-creating process, according to Clear, begins with an emphasis on identity.
Who are you?
Clear gives us the following example to illustrate the power of identity in habit creation. Imagine that you’re out on the town with your friends. You’re trying to break a bad habit — smoking. Somebody offers you a cigarette. You could say, “Sorry, but I’m trying to quit.” Or you could say, “No thanks. I don’t smoke.”
The second phrase sounds more powerful and definitive, right? That’s because it’s a statement about your identity, rather than a statement about a goal. You are effectively saying what you are (a healthy person) and are not (a smoker).
How do we apply this to your financial identity? Dr. John Demartini in a recent episode of Align Podcast gave the following example. In his speaking career, if he asks a room full of people, how many want to be financially independent, nearly all hands will go up. But, if you were to look at the financial actions of each of those people, they would say something entirely different. Chances are, each would exhibit consumerist impulses to varying degrees. They intend one thing (financial independence) but do another (impulsively buy stuff). So, doctor, you need to decide who you are: a saver or a spender. Clear breaks it down into two steps: “1. Decide how you want to be. 2. Prove it with small wins.”
Creating small financial wins
How do you go about making small financial wins? Clear says you should use the four laws of creating a good habit: 1. Make it obvious. 2. Make it attractive. 3. Make it easy. 4. Make it satisfying. Let’s use the first example from the top of this post: Paying off your mortgage early.