How to Start Better Financial Habits that Stick

I'm currently reading the book The Power of Habit: Why We Do What We Do in Life and Business. It is an exploration of the psychology and neuroscience behind our habits, and what it takes to change them.

Clearly, there is a lot of room to apply the principles in this book to personal finance. We all wish we had some more frugal habits. Here are some examples: are there any here that you aspire to?

  • Replacing fast food meals with healthier, cheaper, more fulfilling home cooked ones
  • Reaching for a reusable product instead of the disposable version
  • Cycling to work instead of gassing up the car
  • Getting motivated to run and do body weight exercises instead of shelling out for a gym membership
  • Cutting out meaningless spending like lunch-break shopping, vending machine purchases, and impulse buys

Pick a Keystone Habit


It could be something so simple as remembering your refillable water bottle instead of buying the $1 bottled water.

Rather than trying to do a total makeover of your habits, pick just one and change the routine. Once your brain knows how to re-write one habit, it will be easier to re-write others.


Set Up The Three Parts of a Habit


The three parts of any habit are a cue, a routine, and a reward. This is what your brain needs to "chunk" the habit together, file it in the part of the brain that makes you do things without thinking, and make it a routine.

The Cue: This is the trigger that lets your brain know it is time to do the routine. "Every cue falls into usually one of five categories," Says Charles Duhigg, the author. "It’s usually a time of day, a certain place, the presence of certain other people, a particular emotion, or kind of a set of behaviors that’s become ritualized."

So if you usually grab fast food on the way home from work because you're tired and it's convenient, re-set that cue by having the crock pot ready to go.

The Routine: This is the actual habit itself. Do it every time you "cue" yourself so that your brain will start to do it automatically.

The Reward: Every habit needs a reward so that the brain is motivated to start doing it automatically.

I work in one of the most expensive zip codes in the country, so when I go out to eat on my lunch break, it really sets me back. Yet, the tasty food and the break from work make for such a reward that it's hard to ask my brain to give up that bad routine.

I needed to make a reward that replaced the one I was giving up. Now, every time I bring my lunch from home, I transfer $15 from my bank account to the brokerage account where I buy my dividend stocks. Watching the balance grow is addicting, and I'd rather have an extra share of dividend stock than a restaurant meal.


Here's another example- the habit that I changed two months ago, when I started cycling to work.

The Cue: Time to go to work!

The Routine: Get on the bike and pedal away!

The Reward: Exercise endorphins! Burned calories! A sense of accomplishment! Money saved on a bus pass!

Since the reward was sort of baked-in to the routine, changing this habit came naturally- all I had to do was keep doing it.

Have a Plan for a Stressful Moment

Our new, good habits are fragile in moments of stress. When the going gets tough, we may revert to our old, bad habits.

Studies cited in the book show that people who anticipate the difficult patches, and plan out their actions ahead of time, have much higher success rates when it comes to sticking with good habits.



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