January may be over, but don't let those resolutions fall by the wayside! When you're trying to eat healthily or give up smoking, the key is to change your habits – and your financial behaviour is no different.
Most of what we do day-to-day is a result of our habits – behaviours that become reinforced over time. We're going to take a look at how habits form, and some daily, weekly and monthly habits you can adopt to boost your financial wellness this year.
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The Habit Loop
If you want to change a habit, it's important to understand how habits form in the first place. In his book, The Power of Habit, Charles Duhigg explains what he refers to as The Habit Loop. This is the cycle of cue, routine, reward that reinforces a habit over time. Eventually, we begin to crave the reward whenever we experience the cue, and so the behaviour (the routine) becomes ingrained.
According to Duhigg, there are certain "keystone habits"; if you can change these, you can unlock all other patterns in your life.
So what patterns are holding you back when it comes to your money, and how can you change them?
Unhealthy money behaviours
According to Dr Hersh Shefrin of Santa Clara University, a common bad money habit is a tendency to prioritise the present and near future over the long term. This can mean that we don't start saving for retirement as early as we should, or we take out expensive debt to pay for things we can't really afford.
Other bad money habits identified by Shefrin include:
- Excessive optimism: Downplaying the likelihood of something bad happening and failing to protect ourselves as a result
- Confirmation bias: Not taking it in when someone tells us something we don't hear, or would find it inconvenient to change
- Loss aversion: Experiencing a loss much more acutely than a gain of the same magnitude, making us unwilling to take risk with our money
No doubt at least one of these money behaviours rings true. Read on to find out how introducing a few new daily, weekly and monthly habits can help you to reset your Habit Loop, and make 2016 the year you take control of your financial wellness.
How to change your habits
Every journey starts with the smallest step; trying to reinvent yourself all at once never works! That said, making short-term changes can be difficult if you haven't got to grips with the big picture. A 2006 study found that "dreaming big" helped participants to make better decisions and focus on longer term rewards.
So your first step should be to set a clear long-term goal – but equally important is knowing how to get there. Another study from UCLA found that participants who visualised the steps needed to reach their goal achieved better results, as well as experiencing reduced anxiety levels.
Your goals should be a long-term visualisation of what you want to achieve, and then you can introduce new habits on a daily, weekly and monthly basis to help you get there. The best new habits for you to try will depend on your goals, but here are a few that should help you:
- Be more open. Talking about money is one of the last conversational taboos. Making an effort to be more open about your finances can help you to see if there's a problem, and get help to fix it.
- Try using indecision as a cue: if you're not sure which thing to buy, don't buy anything at all!
- Finance columnist Mrs Moneypenny suggests that everyone should spend one hour a week on their finances. Whether it's going over your budget or comparing utility providers for the best deal, putting this time in will help you to stay on top of things.
- Start keeping track of the "surprise" expenses you can control. You could start by making a note of how much you spend on those occasional lunches out! Knowing the extent of your impulse spending is the first step to controlling it.
- Personal finance expert Penny Golightly says: "Make a menu for the week. This makes it so much easier to create a shopping list that suits your budget, and avoids food waste. (Top tip: check your diary before writing the menu)"
- Put money into a savings account as soon as you get paid. Even if it's only a small amount, it's good to make saving feel effortless and automatic.
- At the end of the month, take a minute to look at your income and spending, and check whether you're on track to meet your financial goals. If not, what can you do next month to improve?
- Penny Golightly says: "If you're paying off debts, once you've chosen a repayment plan then review it once a month. It can prevent them creeping back up again, and it's also motivating to track your progress."
To make sure your new habits stick, use the Habit Loop. On his blog, productivity guru James Clear has some tips on how to set up cues that will make your new habits easy to manage:
"The best way I know to discover a good reminder for your new habit is to write down two lists. In the first list, write down the things that you do each day without fail.
"You’ll often find that many of these items are daily health habits like washing your face, drinking morning tea, brushing your teeth, and so on. Those actions can act as reminders for new health habits. For example, 'After I drink my morning tea, I meditate for 60 seconds.'
"In the second list, write down the things that happen to you each day without fail. For example, 'the traffic light turns red'.
"With these two lists, you’ll have a wide range of things that you already do and already respond to each day. Those are the perfect reminders for new habits."