Harness the power of good financial habits

Dear Sm*artly,

What are some of the best habits/behaviors I can start implementing now for a financially full life?
     Dealing with my finances is NOT my focus a lot of the time. I do budget and try to live wisely and within my means, but um, I definitely can improve and want to know about basic behaviors or things I can do to manage my financial life.

Sincerely, LM

Dear LM,

That is a big topic, but I’m so glad you asked. Thinking of your finances in terms of habits is a great first step. If you can develop good habits around your finances — meaning you incorporate your finances into your daily/weekly/monthly life — you’ll find that dealing your money is so much easier than you ever imagined. In fact, once you perfect your financial habits, you might even enjoy dealing with that side of your life. What?! Yes, you heard me correctly. When you know what to expect, what to do, and when to do it, good financial habits can give you a real sense of effortless accomplishment and relief. And that leaves more time, mental energy — and possibly more money — for your art practice.

How does a habit work?

If you haven’t read Charles Duhigg’s fascinating book, The Power of Habit: Why We Do What We Do in Life and Business, I’ll fill you in with a boiled-down version of how a habit loop works. There are three components: 1) a cue; 2) the behavior or habit; and 3) the reward. For an obvious example let’s turn to one of my favorite vices — coffee.

In my routine, like many others, I wake up in the morning (the cue), feel instantly inspired to drink a cup of coffee (the habit), and immediately afterwards feel great, and ready for the day (the reward). The reward (feeling great) is what reinforces the behavior (drinking coffee) every time you encounter the cue (waking up). So it isn’t a surprise that my first unconscious thought each new day is that since coffee worked so well yesterday morning, as it did the last 10,000 mornings, I think I’ll try it again today!

This self-perpetuating, hard-wired loop takes a powerful hold of your actions once the habit becomes so ingrained that you enact the behavior without even thinking. In fact, the mental programing of a habit is held in a different part of the brain, the basal ganglia, than your decision-making/problem solving apparatus, the cerebral cortex. Duhigg goes into great detail about how this mental streamlining evolved to help us perform important, but well established tasks without having to tap into conscious, cognitive processing, as an efficiency tool. This way we can run from lions on the Savanna while continuing to juggle ostrich eggs, or scream at our kids while navigating through complicated rush-hour traffic. However, as with so many of our evolutionary advantages, the habit loop can backfire.

Get out of your own way

When you look at the financial habits you’ve honed over the years, you may find that many of them could be characterized as unproductive. Let’s turn this discussion back to coffee and look at a seemingly innocuous $4-a-day latte habit. Yes, I know it’s cliché to talk about the price of coffee, but since we’re already on the topic, and it’s one of the more universal fixations, I’d say it’s worth getting clear on the actual cost.

If you spend $4 every day on a venti latte at Starbucks, after 25 years you would have invested $36,500 in coffee, and as large as that number is, it’s not the whole story. There’s a much larger opportunity cost attached to those deliciously frothy beverages. If you were instead to invest $4 every day into a portfolio of stock and bond index mutual funds, compounding at an average annual rate of 7%, after 25 years you’d have $97,232. This habitual fork in the road results in a difference of $133,731.50 in long-term assets! Unless you’re rolling in dough, a Starbucks latte habit can be characterized as unproductive, but it’s also a perfect opportunity to examine your unconscious actions and make some changes.

As I’ve said before, I love my coffee, and I plan to be sipping a nice hot cup on the morning I drop dead, but many years ago I made the conscious decision that instead of spending $4 per day at a café, my default would be a cup brewed at home for 50¢, and to save the rest. With this plan, after 25 years of enjoying my coffee fix, I’ll spend $4562.50 on home brew (1/8th the amount of the previous example) and have $3.50 a day more to save. Invested at the same annual compounding rate of 7%, I’ll end up enjoying my cup of joe next to a warm pile of $85,077.57 — now that’s having your coffee and drinking it too!

If you frequently marvel at how friendly your local café’s baristas are every morning, understand that as a regular customer you’re not only another human being connecting over coffee, you’re also potentially a $100,000 asset… which is more than enough reason to be cheerful.

Action item: Look at your daily habits; do you see anything financially unproductive? Can you see a way to turn it around so you can keep the reward you crave at the cue, while adjusting the expensive behavior?

Build a productive habit

Okay, so now that you’ve started making coffee at home, I challenge you to go deeper into your spending habits by tracking your spending for a period of time to really see where your money is going. I realize that when reading this last sentence you winced, shook your head, and muttered ‘never…NEVER!.’ However, if I lined up every reference to the positive power of tracking your spending, the words would reach the moon and back 85,769 times. Seriously, despite being everyone’s last idea of fun, tracking your spending is one of the very first bits of advice that personal finance experts pull from their tool kit. Why? Because it quickly makes you aware of what you’re actually doing with your money moment-by-moment, in contrast to the hazy month-end glance you take at your credit card bill before paying it.

If you’ve been reading this blog for the last few months you know that I made a New Year’s resolution to track my spending for an entire year. It’s been 3-1/2 months, and I haven’t missed a single quarter dropped into a parking meter, and the results have been profound. The good news: I’ve spent far less in the last three months than I thought possible! The bad news: the dirty truth about my unrealized, unproductive spending habits has been carefully recorded and tallied up on a weekly basis, and I’ve had to face some unexpected realities.

First and most shocking is that I spend too much money on fish tacos. My 3-year-old daughter and I have grown to love dinner out at a neighborhood restaurant that serves fish tacos for adults and fish fingers for kids, while projecting Disney movies on the wall of their outside patio. Perfect, right? Since we don’t watch TV at home, and the breaded fillets are so delicious, she and I both look for any excuse to go there. This practice seemed innocent enough, even bonding, but in the second month of tracking my spending I couldn’t believe it when I totaled up all my expense categories and found that I had spent more on restaurants than on groceries!

I think of myself as a frugal person, and if I hadn’t been writing everything down I could have easily breezed right passed this misstep. But one quick glance at my notebook reveals the cold awful truth documented in my own, barely legible chicken scratch: based on actual spending data, breaded fish had become a major financial investment for 2015! WTF?!

Luckily, armed with my new understanding I can take control of the situation and ease up on the fish taco consumption, while still on occasion indulging in an evening outdoor viewing of the Jungle Book. And yes, you guessed it, I’ve started breading my own fish at home — which is way cheaper, easier that I could have imagined, and just as delicious!

To answer your inevitable question about whether tracking my spending every day is annoying and cumbersome, I can truthfully say, it’s not; in fact it’s easy. At this point I don’t even think about it, and when I do, it actually feels empowering, and I’m grateful that I put this habit into practice. Already the habit loop is working for me!

Action item: Get yourself a little notebook to keep with you at all times and start recording, or you can use the awesomely helpful expense-tracking notebook I created just for this purpose, with an artist’s expenses in mind. Check out the details of the Sm*artly Expense Tracker HERE.

Automate when you don’t have the willpower

Automating good habits is all the rage these days in Personal Finance. It’s old news that you can link your bank accounts to your investment accounts, and set up regular periodic investments. Still, many of us don’t take advantage of these helpful digital habit builders. You may think that if you had extra money lying around, you’d definitely send it right over to your Roth IRA, but just like it’s hard to remember to floss your teeth before bed when you’re already tired, it’s hard to find a reason to send your money out of reach for decades when there’s seemingly so much you can do with it now. That’s why automating is such an essential tool. It takes the sting out of waving so long (but not good-bye) to your money for the time being, so it can do the hard work of compounding for your future self. If you have to make the decision and take action every month in order to fund your retirement account or other savings plan, you’ll be lucky if you do it occasionally. When you set up an automatic investment schedule, the hard work is done in one sitting, and it will do the job indefinitely.

Need to start with baby steps? Just set up a periodic automatic transfer from your checking account to your savings accounts. If you have an accidental overdraft the money is still there, and once you realize that you don’t even notice the money being whisked away, you can set your more advanced saving/investing plan to autopilot.

Good habits aren’t all about cash in hand

Good habits surrounding your health and wellbeing will also translate into powerful long-term investments. Many of us feel left behind when we think of our retirement savings. In fact, CNN Money reported a 2014 Federal Reserve finding that 31% of adult Americans have nothing at all saved for retirement. So if you’re like almost everyone and don’t feel flush with retirement savings, you should be considering a parallel investment in a healthy lifestyle as priority number one.

Last fall, Fidelity Benefits Consulting reported data indicating that a 65-year-old couple retiring this year will need about $220,000 to cover medical expenses throughout retirement. And that number doesn’t include long-term care. So consider throwing heart disease, diabetes, or some other terrifying health issue into your monthly expenses and that elusive retirement goal will quickly move even farther away.

And though our future health is to some degree out of our control, the appropriate preventative behavior is obvious. We’ve all heard it a million times, but you may not have put a healthy lifestyle in the context of dollars and cents. Getting regular exercise, and having good nutrition and stress relief, while cooling it on the drugs, cigarettes and alcohol, will pay real financial dividends now and later in life in the form of saved healthcare expenses.

It’s my opinion that no matter how old you are, if you’re under-saving for retirement because you just can’t scrape together the cash, then you’d better get your butt outside for 30+ minutes of exercise each day, take a pass on the cheese doodles, dump the smokes, and switch to tonic and lime. You can’t afford not to!

By creating habits out of these personal finance ‘best practices’ you’ll be able to have what every artist wants: the ability to deal with your money without thinking about it. As I mentioned earlier, once a behavior is ingrained it gets stored painlessly in your basal ganglia, leaving your cerebral cortex free to engage in your creative intellectual processing. That way you’ll have more mental space for your art practice, while your personal finance tasks are accomplished almost effortlessly.

How long does it take to create a good habit?

In the 1960s, Dr. James Maltz theorized that it took “a minimum of 21 days for a new habit to jell”, which for decades gave people an overly rosy picture of how quickly they could harness their subconscious for maximum automation, and then dashed their hopes in disappointment when it didn’t happen so quickly. More recent research performed by Phillippa Lally at the University College of London indicates that on average it takes 66 days to form a new habit, though her study participants reported results ranging from 18 to 254 days.

So what’s the point? Here’s my radical idea for you LM: if you dislike dealing with your finances, and generally try to ignore them, why not put some effort into creating productive habits to move things along in a positive direction, while ultimately minimizing your mental effort? Take the next 2 months to really focus on developing good personal finance behavior, such as identifying and adjusting existing unproductive habits, tracking your spending, automating your savings and developing a healthy lifestyle. Two months may seem like a long time to slog through this, but you have your whole life to deal with your finances. Acting now will free up immeasurable mental processing power, and ultimately serve your creative practice, and your bottom line. Hope this helps LM, and good luck!

Sincerely, Christina

If you have good habits, unproductive habits, or thoughts about this post, I’d love to hear from you in the comments or directly at christina@sm-artly.com.


3 Responses to “Harness the power of good financial habits”

  1. Bari April 19, 2015 at 1:24 pm #

    OMG this woman can not only advise on finances, she could write your autobiography! about how you became the Millionaire Next Door! Beautiful writing, great advice. (though the $36 thousand given to starbucks is NOT sitting well with me…..)

  2. Harmony April 16, 2015 at 6:42 pm #

    Got me thinking about my expensive coffee habit, – which is more about my cream & sugar addiction, and my desire to sit in a cafe and read a book. I could save time and money! 🙂

  3. steve April 13, 2015 at 1:24 pm #

    Wow! So insightful! I always feel like LM, and I figured it was just a fact of life. But, now that I’ve read your suggestions, they seem so obvious (and simple!). I’m going to order your expense tracker today (what a great idea, and, yes, I’m too lazy to go out to get my own notebook…). BTW, I love your blog. It’s so empowering!

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