Use the Power of Habit to Achieve Financial Independence

It’s that time of year where New Year resolutions are established by people all over the world with the hope they will lead to positive changes and improvement in the coming year.  So many of these resolutions never stick and by spring time we are back to our same old habits.  These resolutions are usually about something we have wanted to improve upon for a while – money, weight, diet, work, family – but they usually do not work and are abandoned early on.  Why?  I believe part of the reason is we fail to create new habits that support these resolutions and we do not change our old habits that get in the way of accomplishing our goals.

The Power of Habit

So much of our daily lives are preset by the habits we have established over a long period of time.  The Power of Habit, a book by Charles Duhigg, describes how habits are created and how much they impact our daily lives.  The reason is once an activity becomes a habit it takes a lot less energy to do the activity (you are able to go on auto-pilot to complete the activity) and your body anticipates the reward from completing the habit-based activity.  The book describes what is called a habit loop, stating that every habit has a cue, a routine, and a reward. Cues trigger the habit and can be almost anything, from a visual trigger such as a piece of candy to a certain place, time of day, or emotion.  Cues start a routine, which is the habit.  Biting nails and religiously exercising every morning at 4:30 am are two examples of routines.  The routine needs to result in a reward to get the habit to stick – rewards are usually some type of physical or emotional payoff for the individual.  As an example, take someone’s drug habit.  There are probably a lot of cues that can trigger an addict’s desire to take drugs.  Bodily cravings, hanging out with a certain group of people, and emotional distress are some examples of possible cues.   Buying and taking the drugs are the routine, or the habit.  The reward is the high the drug user gets from taking the drugs. Research has shown that the unconscious mind does not know the difference between a good or bad habit but by understanding how habits are formed we can establish good habits in our life and try to replace bad habits with good habits. 

This is my laymen’s interpretation of the book but if you want some more details I suggest you read Part One (The Habits of Individuals) and the Appendix.  I use this information to help me with habits related to my finances, exercises, and diet.  It works for me although it takes time to instill new good habits and to replace existing bad habits.  I have found I need to put in effort for at least several months in order to get a habit to take hold. 

With this information in mind, set financial goals this year that will help you achieve financial independence but support these goals by creating habits using cues, routines and rewards.  You also should identify bad habits that are getting in the way of achieving financial independence, identify the cues, routines, and rewards behind them, and then work to remove the bad habit.

A Habit to Spring Board Your Move towards Financial Independence

Every time you get a paycheck, transfer 30% of the after-tax income into a new account and then allow yourself to look at the balance of the new account after every transfer.  The cue is the paycheck, the routine is transferring a percentage of your income to a different account, and the reward is the watching the account balance grow.  I implemented this exact habit over ten years ago to help me achieve financial independence and I can attest that the habit becomes more and more satisfying as that account balance grows.   

A Bad Habit that is Costing Me Too Much

Every time my wife and I go to a restaurant we always order separate items even though she usually wants to share and we usually do not finish the meals we order. The cue for me is eating out, the routine or habit is me stubbornly insisting I order my own food, and I guess the reward is my massive intake of salty and sweet foods.  I usually regret making this decision not to share but I do it again the next time.  My wife and I typically like the same type of food so there is no reason not to share. This habit probably took hold during my years of eating while traveling for business and never having to worry about paying for the bill.  The bad habit does not help my wallet and it does not help my waistline.  My family spent several thousand dollars at restaurants last year and I probably could have saved at least $1,000 if I listened to my wife and shared meals.  In 2020, I am going to replace my current routine/habit with sharing a meal with my wife and my new reward is to calculate how much we save each time we share our meal and keep a running total for the year.  I am going to apply the information I learned in The Power of Habit and I will let everyone know how it goes.  I would love to hear if others can identify bad habits getting in their way of financial independence and if they can change those habits using the information put forth in The Power of Habit and summarized in this post.

Motivation and Belief can make Good Habits Stick

Sometimes bad habits are tough to break and good habits are tough to implement.  You need to have a belief that you can make the right choices and have the extra motivation to help you choose the right habits and get rid of the wrong habits.  I am a big believer that understanding your motivation to make changes can be a tremendous help to sticking with good habits – that is why I recommend you read my post on Finding and Strengthening Your Motivation to Achieve Financial Independence in conjunction with this post on habits. I recommend you make habit formation part of your tools to achieving financial independence.