“Change might not be fast and it isn’t always easy. But with time and effort, almost any habit can be reshaped.”

Charles Duhigg

 

Simply having goals without good habits is not enough to reach them. Having a desire to lose to 20 pounds or saving $10,000 within a year is an empty promise without a plan and good habits.  We have the abilities to improve them with hard work, persistence and perseverance.

Goals Should Be SMART

To better reach goals, a SMART approach can bridge the gap to better habits. George T Doran first introduced the acronym in Management Review in November 1981. This approach can be adapted in personal finance.

  • Specific
  • Measurable
  • Achievable
  • Realistic (or Relevant, Reasonable)
  • Time

 

A SMART Example: Saving For An Emergency Fund

You want to establish an emergency fund to cover essential living expenses for unexpected events like a potential job loss. While you haven’t lost your job yet, you haven’t set any money aside. So it is time to open up a high yield savings or money market account. Save by utomating weekly transfers of your paycheck here until you get to a 6 months target. (SPECIFIC)

How long should it take to save for 6 months of living costs? It depends on how quickly you reasonably are able to save for this account for it be fully funded. (ACHIEVABLE, REASONABLE) Keep in mind that your savings are after-tax income. If you are able to save 5%, then your spending amounts to 95%. If you can save 20%, there is 80% for spending purposes. (MEASURABLE)

A back of the envelope calculation can help determine how long it will take, courtesy of Dough Roller. To save one month’s needs, divide the percentage of spending by the percentage you are saving. If you can only save 5%, you are spending 95%. Divide 95 by 5 and it will take 19 months to save one month for your emergency fund. More aggressive savings of 20% of after-tax income, produces a more satisfactory 4 months timeframe. (TIME)

Setting Goals Are Not An Achievement

Many a year I have started out with a pledge to lose 20 pounds, eat more healthy and exercise. Some years I would even get part of the way there but my bad eating habits would kick in. It is then easy to give up than starting from scratch.

Overeating is not very different from overspending. If you want to cut your monthly spending by 10% you need to modify how you shop. Having a target is hard to accomplish without a change in behavior.

Our Targets May Be Unrealistic

My spendthrift husband Craig, after a spate of wasteful buys, will declare his big purchase days are over. Of course, that is not a sensible goal. He loves to read as I do. We both go to the library often to save money and space. When we recently hired movers, the younger guys couldn’t believe that nearly half of our boxes were for books.

So you can imagine my surprise when going through Craig’s bills, I found hundreds of dollars in the span of a couple of weeks spent on buying kindle books. It even surprised him. He was just seeing them as modest purchases of $1.99 or $2.99 purchases a piece. Maybe Craig didn’t make big purchases but he did overspend on books that he may never read.

The Need For Discipline And Willpower

To carry out your goals, you need to be diligent. Without discipline and the will to succeed, goals are unsustainable.

Charles Duhigg wrote in The Power of Habit:Willpower isn’t just a skill. It’s a muscle, like the muscles in your arms or legs, and it gets tired as it works harder, so there’s less power left over for other things.”

We sometimes lose our will to make changes when life interrupts us with the need to divert attention from our goals. Sometimes a death in the family can cause a major derailment. Discipline and willpower need to be supported by a conscious plan to return when surprise events occur. This way a  momentary pause doesn’t become a permanent loss in interest.

“The chains of habit are too weak to be felt, until they are too strong to be broken.”  Samuel Johnson

The Benefits of Habits

 

Habits Allow Us To Be Efficient

Once formed, habits allow us to do things automatically in everyday life. Our habits form through repeated actions that may come with rewards.

According to Johns Hopkins University Professor Susan Courtney, our brains release dopamine, which facilitates the building of connections between brain cells.

To break a bad habit, Courtney says you have to activate a different part of the brain (prefrontal cortex) to override those habitual tendencies. However, the prefrontal cortex is easily distracted and doesn’t work well when you are tired or stressed. She explains that that part of the brain is vulnerable. When stressed, those habits that are hardwired into the other parts of the brain automatically take over.

Breaking Bad Habits

We can break or curb bad habits by overwriting the old ones in your brain. Setting up physical reminders, changing patterns you want to break or even hiding things. Putting cookies away in a different place or hiding credit cards may work. Going shopping with only cash will slow unnecessary spending.

Habits May Exceed Your Goal

Goals may limit you whereas good habits may allow us to go beyond our targets. I am at fault for setting 30 minutes as my time on the treadmill and jumping off. This happened because I may need to make a call or go to work. However, once I took away the time limit, whether on the treadmill or outdoors, I found more energy to go further.

Repetitious nature allows us to fulfill our goals more easily. It may mean going on the treadmill everyday at a certain hour, reading at a certain time in the evening or going shopping without credit cards.

Individual Choices

Many of us borrow too much by putting everything on our credit cards. We are often surprised by how fast our debt balances grow. Saying you will reduce your debt to zero is a great goal but may be difficult and too far away.

You need to have a plan to reduce debt that didn’t build overnight. There are two popular ways to do this. The Snowball method, where you tackle the smallest debt balances first, is often preferable for many. Small wins provide a psychological boost. For others, the alternative, often referred to the Avalanche method is better. There, you are reducing the debt carrying the highest annual percentage rate first.

Either way, reducing debt regularly or paying down your balances to zero are good financial habits to reinforce constantly for those who struggle to pay bills.

Habits For Life

I sometimes envy daily runners plowing on in the heat, snow, rain and sleet. They have formed healthy fitness habits that will last all their lives.  According to Duhigg’s research, habits control 40 percent of our conscious activities. Taking showers and brushing teeth are activities we just do it. That’s a good thing. Our lives would be far more chaotic if we didn’t have the ability to form habits.

That said, these minuscule actions are ingrained in us. Habits often propel even our driving. Ever drive on a common road and don’t recall getting there. I don’t mean that you forget you were driving. It is more like you were on automatic pilot.

Keystone Habits

Building a single habit can be modeled into other habits, having a compound effect on our lives. Through the years, I have added small activities into my day usually at the same time. I  grab my book or iPad for daily reading (I read 43 books last year), do the New York Times crossword puzzles (I can’t finish much of Thursday on), daily walks and review stock positions.

These are connected habits that built on my desire to read but I wanted to do more. I deliberately use these fun activities to stimulate my brain and defeat my fear of wasting time on the Internet.

Duhigg calls these keystone habits which are a chain of several related good habits. When my 14 year old daughter worked this summer, she insisted on going to the bank every time she had a paycheck in hand. She then was excited to pick up other side jobs so she could bring cash to put into her savings account.

People who exercise daily, tend to eat better and drink less alcohol or coffee. Replacing a bad habit with good habits that are linked together may have a powerful chain reaction. For example, it strengthens a person’s conviction to lose more weight after shedding a few pounds.

Creating Keystone Habits For Better Money Habits

 

As the new year is fast approaching, use keystone habits to:

  • support other habits.
  • provide small steps towards victory in previously difficult areas for you.
  • give you the confidence and motivation to better manage money.

 

Spend Less Than You Earn

By spending below your means, you will save and invest more. However, to accomplish this, engage in tracking your spending and expenses on a regular basis. Review your bills online daily. Automate payments for easier ways to pay ontime. Look for patterns that may reflect overspending for items you don’t need and possibly more debt than you can handle. 10 Ways To Better Manage Spending

Benjamin Franklin said, “Beware of little expenses. A small leak will sink a great ship.”

Payoff Your Debt

Many people pay only the minimum amount required on their monthly credit card balances. That is simply not enough. It leads to excessive interest levels because of high annual percentage rates on credit cards. As such, total interest costs may exceed the purchased merchandise you are paying over longer periods than you should.

Instead, pay more than the minimum required for a start. Slow your spending and reduce your debt. Use more cash which actually lets us feel that cost immediately. Ultimately, you should pay your monthly bills in full. It provides a very satisfying peace of mind.

Create A Budget For Better Control Over Spending

Create a budget so you can better track your fixed and variable costs. If costs are too high, make needed changes. Use a financial planner if you don’t think making a formal budget will work for you. Separate your monthly fixed costs which must be paid separately and first.  Discretionary spending is what you have left, if any. Use budget apps with customizable alerts, help you analyze your spending habits by category and different time perspectives.

Budgeting may help you identify bad habits that are fixable so long as you put in the diligent effort.

Spending less than you earn, paying off debt and budgeting are intertwined. Together, they are keystone habits that can improve chances of working into better habits.

How Long Does It Take To Change A Bad Habit?

I had always heard that it took a 21 days to break a bad habit. As a member of Weight Watchers, which is ALL about breaking bad eating habits (and it definitely works for as I am down 30 pounds and declining!) they always refer to the 21 days. However, I did not know its origin.

The 21 day time frame  dates back to the nearly 70 years. Dr. Maxwell Maltz, a 1950s plastic surgeon found that it would take his patients about 21 days to get used to seeing their new face or post amputation, they would sense a phantom limb. Dr. Maltz wrote about his own adjustment period to changes and new behaviors to form a new habit….”it requires a minimum of about 21 days for an old mental image to dissolve and a new one to jell.”

There is more research that indicates that it takes a longer time to form a new habit than 21 days. A 2009 study published in the European Journal of Social Psychology by Phillipa Lally, a health psychology researcher at University College London, indicated it took 66 days on average (in a range of 18 days to 254 days) to form a new habit.

Whether 21 days or 66 days, it takes significant time, effort and determination to create a new habit.

How To Build New Habits Through Habit Stacking

James Clear has studied and written extensively on habit stacking, including in his book, Atomic Habits. Clear says the quickest way to build a new habit into your life is to stack it on top of a current habit. This is called habit stacking. First, Clear explains how a study of synaptic pruning may lead to building new, and presumably better habits.

In a 2007 study from Oxford University, researchers compared newborn baby brains with those of adults. They found that the average adult had 41% fewer neurons than the average newborn.

A Surprise Result

This was a surprising result considering that babies are born with blank slates. They don’t have the strong connections adults have. However, adult brains prune away connections between neurons that don’t get used and build up connections that get used more often. It is a biological change that leads to skill development.

Are you with me? This may mean that synaptic pruning could lead to building new habits.

Habit stacking is related to implementation intention, created by BJ Fogg, it is a pairing a new habit (you desire) with a current habit (you have). You are using habits that already exist and adding a new behavior. Using this method increases the likelihood you’ll stick with a habit by stacking new behavior on an existing one.

Habit Stacking: Money Examples

When I want to buy something for $100, I will put it in the online shopping cart and wait 24 hours.  This example encourages delaying impulse shopping which often leads to overspending and borrowing.

After I have my morning coffee (or dinner), I write my “to do” list. This is for those who need to organize their day.

When my “to do” list is done, I will do my first chore. Procrastinators need an action plan.

Once I finish dinner, I will review my spending tracker, review and pay my bills online.

When I review my bills, I will review my subscriptions to services and pare those plans down.

Make new behaviors as routine as possible. Automate your paycheck so that you are putting away money for your emergency fund, a 529 savings plan or in your retirement accounts. These are actions that should be done regularly and as early as possible.

Final Thoughts

It is easy to make a goal, a target or resolution. Carrying them out to fulfillment is the hard part. When it comes to money goals, learning to specifically plan out goals with a SMART approach my enhance our chances of success. We can reach our goals through better financial habits whether that means a cut in our spending, less borrowing or learning how to budget.

Can we adopt better financial habits? Science says we can with discipline, willpower and effort. Work on keystone habits and habit stacking to expand the likelihood of doing so.

Have you had success modifying a bad habit or building a new one? What worked for you during the transition? We would like to hear from you.

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