If losing weight was as simple as creating a diet and workout plan, everyone would be in shape. And let’s be honest, if financial independence was as simple as creating a budget, everyone would be retiring early. The difficult part is sticking to your plan.
On this site, I will post about numbers, budgets, and saving. But I’m going to spend more time discussing forming habits and tips/tricks to sticking to your goals.
In this post I’m going to share tips for building habits crucial to your success in your journey to financial independence. Most of these tips come from the book “Atomic Habits.” I highly recommend reading this book for further information on building habits.
Why Habits Are Critical to Success
In the beginning, the first few hundred & even thousands of dollars saved won’t seem like they make a difference. It was discouraging to me how much work was required for a seemingly little difference. But those dollars start adding up, and those dollars will earn more dollars through interest rate compounding. Eventually you will hit a point where the compounding becomes visible and significant, and it will be easier to stick with it.
The only way you will reach this tipping point is if you keep adding the dollars. It must become a habit before it will make a difference. Every time you receive a paycheck, you move your desired amount to your investments.
In Atomic Habits, James Clear even uses an analogy comparing the compound effect of habits to the compounding effect of money:
“Habits are the compound interest of self-improvement. The same way that money multiplies through compound interest, the effects of your habits multiply as you repeat them. They seem to make little difference on any given day and yet the impact they deliver over the months and years can be enormous. It is only when looking back two, five, or perhaps ten years later that the value of good habits and the cost of bad ones becomes strikingly apparent…Success is the product of daily habits—not once-in-a-lifetime transformations.”
He stresses that the trend of your habits is more important than your current state. In financial terms, continually investing more money (the habit) is more important than your current net worth (the current state):
“It doesn’t matter how successful or unsuccessful you are right now. What matters is whether your habits are putting you on the path toward success. You should be far more concerned with your current trajectory than with your current results. If you’re a millionaire but you spend more than you earn each month, then you’re on a bad trajectory. If your spending habits don’t change, it’s not going to end well. Conversely, if you’re broke, but you save a little bit every month, then you’re on the path toward financial freedom—even if you’re moving slower than you’d like.”
Make Your Money Systems A Habit
“You do not rise to the level of your goals. You fall to the level of your systems.”
In other words, it’s not enough to want to be financially independent. You must build and implement systems to get you there. This is why I recommend building a budget and automating your payments, savings, and investing.
I also have made a habit of regularly using Personal Capital, Mint, HiCharlie to make sure I am sticking to my budget and to track my net worth goals.
Habits Form Your Money Identity
Many people look at their current spending and net worth and claim that they are “just not good with money.” This very thinking makes someone less likely to seek out information and try to improve their financial situation. No one is naturally good with money; it is the result of taking action to learn and forming good money habits.
From Atomic Habits: “Ultimately, your habits matter because they help you become the type of person you wish to be. They are the channel through which you develop your deepest beliefs about yourself. Quite literally, you become your habits.”
The Five Ways to Create Good Habits
Okay, okay, I’ve said enough about why I believe habits are important for building your wealth. Now let’s get into some actionable steps you can take!
The five ways below are from Atomic Habits, but I have added some ideas for each that specifically relate to building good financial habits.
1. Make It Obvious
You’re more likely to form and stick with habits if they’re obvious. Plan when and where you will accomplish your habit.
Here are some ideas to make your financial habits obvious:
- Plan when you will review or fill out your budget tracker and set a recurring calendar reminder
- Download Personal Capital and Mint apps and put them in an obvious location in your phone
- Surround yourself with good financial motivation (podcasts, books, and newsletters)
- This will remind you to be conscious of your spending and motivate you to improve
- Write down your “why” and post it in your room
2. Make It Attractive.
If a habit is not fun (and let’s be honest, I guess finance isn’t fun except for nerds like me), pair it with a habit you like and already do on a regular basis.
- Commit to reviewing your spending prior to watching Netflix for the night
- Read your “why” statement prior to showering, brushing your teeth, etc.
- Invest your money in index funds (which is ideally automatically transferred to your investing account) whenever you receive your paycheck
3. Make It Easy.
The key to forming habits is to reduce the friction as much as possible. And start small—focus on building one good financial habit at a time.
- Start with investing 1% of your paycheck, and increase it by 1% every month so that it is easier to adjust
- Use Personal Capital or Mint to track your spending instead of doing it manually
- Automate your savings to deduct from your checking account after each paycheck
- Invest in only 1 or 2 index funds
4. Make It Satisfying.
Start by giving yourself an extrinsic reward, until the intrinsic rewards of seeing your net worth grow kick in.
- Treat yourself to a dinner out every time you grow your net worth by X amount
- With each raise or bonus, commit to saving half of it and commit the other half to your “fun” budget line item
The Five Ways to Break Bad Habits
The five ways to break bad habits are simply the opposite as the ways to make good habits.
1. Make it invisible.
Get rid of bad environment triggers that encourage destructive financial behavior.
- Stop going to Target if you leave with more than you intend to buy (shop online instead)
- Get rid of things that trigger you to shop (unsubscribe from store promotions, etc)
- Wait a week before buying something you want
- Delete apps that make you shop
2. Make It Unattractive.
Break a bad habit by pairing it with an undesirable activity.
- Every time you overspend on a monthly budget, don’t go out to eat for the next month
- Whenever you order take out, go on a 2-mile run the next day (or whatever is difficult for you)
3. Make It Difficult.
Increase the friction between you and bad habits.
- Put savings in a different account that’s more difficult to access (so that you’re not tempted to spend it)
- If you don’t save as much as planned one month, find something to cut in the following month to make up for it (this will motivate you to not repeat this in the future)
4. Make It Unsatisfying.
- When you buy something unnecessary, calculate how many hours you worked to buy that item
- Journal about why something was a bad purchase
Those are my best ideas for forming good habits and breaking bad habits! If you have more ideas, please shoot me an email and I will add it to the list above!