To form good money habits that work, let’s define what a habit is.
According to the American Journal of Psychology, a habit is a “way of thinking, willing, or feeling acquired through previous repetition of a mental experience.”
The reason why good money habits are super helpful to long-term financial well-being is in the word “repetition”. We perform those actions often without feeling like we had to intentionally make an effort for them. We just spend smarter, save more and invest the savings naturally.
The thing is, money habits take time and initial effort and determination to develop. To help us build them, we need to understand their 4 stages to formation.
1. The Trigger
Things that happen around us trigger our actions and behaviours. When we respond to such triggers, we expect results and returns. Triggers are cues like being hungry and thirsty, needing a roof over your new family’s head, starting/leaving a job etc. The triggers can cause us to desire more investment returns, advance careers, hedge against market risks, earn more money, build certain relationships, achieve statuses etc.
2. The Urge
Urges are what drive habits-building. It’s how much we want to act on the trigger and achieve the results it brings about. E.g. We may not feel the urge to save money, but we feel the urge to be able to buy something later. Or, we may not have an urge for buying gold, but have the urge to protect our money from inflation.
3. The Action
This is about us actually taking action that will later form a habit, such as putting some money away regularly, keeping our receipts to track spending, making regular investment payments to build up our portfolios etc. These actions do not always make us feel pleasurable, and they are not always easy. But we still do them in expectation of the next and final stage. Thankfully, in this digital age, there are many ways to automate them and make building habits much simpler.
4. The Outcome
This is the payoff, the result, the goal of the action, which could be
- Feeling satiated from a good meal
- Feeling healthier/confident after a workout
- Receiving good payouts for good work done
- Seeing your savings fill up and feeling richer
- Seeing this month’s spending go down and feeling savvier,
- growth in your investments etc.
Achieving outcomes signal a reward in our brains, and the enjoyable feeling prompts a dopamine release. “If you do something over and over, and dopamine is there when you’re doing it, that strengthens the habit even more. When you’re not doing those things, dopamine creates the craving to do it again,” according to Dr. Russell Poldrack, a neurobiologist at the University of Texas at Austin.
How to make them work for our financial well-being?
There are 2 components to improving financial well-being through habits:
- BUILD habits that increase our money.
- BREAK habits that decrease our money.
When building GOOD habits, the triggers should be obvious so that we will notice them, feel the urge and take action. When we were younger, our trigger to brush our teeth every morning would have been our mothers who are impossible to ignore. Likewise, if we have a savings goal, we want to make sure we are constantly reminded of it, either with posters all over the house, or simply have an app like Hugosave remind you regularly with push notifications and trackable Money Pots.
When breaking BAD habits, we do the opposite. Avoid spending triggers like online shopping sites, catalogues, ecommerce app push notifications etc.
Paradigm shift
One way to boost our good financial habits-building exercises is to reshape the way we think about them. Building financial habits requires commitment, and commitment requires us to believe in it. Instead of thinking, “I need to spend less”, “I need to save more”, or “I need to invest”, turn what we thought are obligations into opportunities; “I get to reduce money wastage”; “I get to build up my savings”, “I get to invest for growth”.
The small things count
This is why the Hugosave mantra of Little, Often and Early is going to help us go a long way. Habits, when built, become effortless, second-nature, and no less effective. Before we know it, these habits contribute towards our financial well-being in bigger ways than we could imagine!