Financial Success Is A Matter of Habits

Habits are the compound interest of self-improvement.” – James Clear, Atomic Habits

By Kyle J Christensen, Founder of Unique Advantage

Unique Advantage Monthly Client Email 01/01/2024

Have you ever noticed that you put the same shoe (right or left) on first every time?  Have you noticed that you put the same sock on first every time?  We are creatures of habit.  Habits are formed from lots of repetition of doing something or thinking something.  Our brains create neural pathways that act almost like ruts in our minds.  Those neural pathways make the actions or thoughts automatic, similar to Pavlov’s dog salivating at the sound of a bell.  

The formation of habits almost always start mechanically but over time they require less and less mental energy.  They become automatic.  All habits, according to the book Atomic Habits, have four steps.  There is first a cue, then a craving, then a response, and then a reward.  

Habits can be good or bad, helpful for your health and welfare or detrimental to your health and welfare.  Habits like brushing your teeth regularly, are good.  Habits like eating while bored, are generally detrimental (I picked this one because it definitely applies to me).  We function, almost in everything we do, based on habits.  

The same is true for our personal finances.  The success we hope to achieve financially, is directly tied to our financial habits.  I think it’s helpful to use the four elements of habits and turn them into questions as we analyze our financial choices.  When faced with a money decision, what is the cue that triggers my attention?  When faced with a money decision, what is the craving I am trying to satisfy?  When faced with a money decision, how do I respond?   When faced with a money decision, what reward do I receive?

A cue can be anything that stimulates me to think about making a financial choice.  The cue can be internal (coming from yourself) or external (coming from outside yourself).  A cue could be a goal you’ve set for yourself (internal).  A cue could be the beginning of a new year (external). 

The craving can be physical, mental, emotional, or social.  For example, a lot of people contribute to their retirement account, not because they’ve done a significant amount of research into it, but because everyone else is contributing.  They don’t want to stand out or be different.  Or they may be doing it because of the allure of getting something free (“free match”).  Or, a person may spend money to buy a hamburger, not because they’ve really thought things out and compared the cost (both financial and health), but simply because they are hungry (craving) and they drove by a Whataburger (cue) and it was close to noon (cue).   

Our responses, like Pavlov’s dog, are generally automatic.  Most people, when trying to make a change, really focus on this step in the process.  They try, through sheer will, to change this, and predictably, in most cases, they fail to make the change.  This is probably the least effective place to make the change.  Author, James Clear, suggests that “whether a response occurs depends on how motivated you are and how much friction is associated with the behavior.  If a particular action requires more physical or mental effort than you are willing to expend, then you won’t do it.”  The opposite is also true, if it requires little or no effort to respond, then it’s much more likely that you will do it.  Unfortunately, human nature is to try to find the path of least resistance.  This brings up an important point about financial success.  The path of least resistance is NEVER the path that leads to financial freedom.  So, one thing we can make a conscious effort to do, is make the wrong path (the choices that lead to financial failure) much more frictional (make it less easy to spend money on wasteful things).  

Everything we do, we do because we perceive (I say perceive because sometimes it’s just a perception of a reward and not truly a reward) that we receive a reward for the thought or action.  And our perception is the only thing that matters as it relates to our choices.  A morbidly obese person might perceive a benefit from eating another biggie size meal from a fast food joint.  The reality is, the biggie size meal doesn’t truly help the person, especially long-term.  But, the person’s perception is what matters.  So, he does it because he perceives a reward.  It tastes good.  He receives a dopamine hit from the excess sugar, salt, and fat.  It’s easy.  It’s fast.  It requires little effort.  It’s on the way home and there won’t be any dishes to clean up after.  A lot of financial decisions are made the same way.  The reward of fitting in.  The reward of getting something for nothing (“free”).  The reward of the financial industry saying you’re doing the right thing.  The reward of not having to change or put forth additional effort.  Of course, all of these “rewards” lead to continued bad behavior financially. 

If we want to succeed financially, we need to choose different rewards.  Set clear objectives related to financial freedom.  Think about the consequences to your family, your relationships, and the things you care about, if you were to become financially free.  The challenge of becoming financially free is large.  If the reward is LARGER, then we aren’t going to be willing to do what’s necessary to get there.  This is why it’s so important for us to take the time to think and discuss why it’s important for us each to become financially free.  If the person passing Whataburger doesn’t have a good reason not to stop and buy the meal, if the reason for making another choice isn’t greater, then the easiest path will win (which usually means, not changing).  

The title of the book Atomic Habits is awesome because it points to how a person can change or stop bad habits and how a person can implement new, more beneficial habits.  Atomic means, “an extremely small amount of a thing.  The single irreducible unit of a larger system.”.  It also means “the source of immense energy or power”.  I love the combination of those definitions.  If we want to make a big difference in our lives financially, it can’t be done by trying to make big changes all at once.  It can and is done by making small changes (atomic changes) in our habits.  And those small changes in our habits make massive differences in our future (“source of immense power”). 

My challenge to you, to begin 2024, is to find one small thing you are 1) willing, 2) ready, and 3) able to change in your financial habits.  Is it going to be using an app (like Mint) to track all of your income and expenses?  Is it going to be to make more meals at home (what days, which meals, etc?)?  Is it going to be to stop paying for a gym membership and workout at home?  Or will it be to schedule times to workout each week at the gym you are already paying for (getting more out of your money)?  Are you going to set up your Wealth Coordination Account and choose a percentage of your income to save?  Are you going to increase your rate of savings by 1%?  Is it going to be to read self-help books every night for ten minutes?  What will you do?  

We each get to choose what our future will look like.  Our habits are what are either helping us or hindering us.  If you haven’t read James Clear’s book, Atomic Habits, I would highly recommend it.  Reading is essential to long-term growth and success.  

There will likely be some crazy things that happen this year, but for the most part, you are in control over what happens to you financially.  You can get rid of bad habits and adopt better ones.  Your habits will determine your success.  I wish you all the very best in 2024.