How to change bad financial habits (and keep good ones)

Woman holding pink piggy bank

Anyone who has tried to quit smoking, lose weight or stop biting their nails knows that it's hard to break a habit.

But it's not impossible.

Charles Duhigg's fascinating new book, The Power of Habit, talks about how habits form and what you can do to change them.

What's great about the book's insights is they can be used in almost all aspects of your life, including your personal finances.

Duhigg, a business reporter for the New York Times, says the brain forms habits because habits are an efficient way of doing business.

He uses the process of backing a car out of a driveway as an example.

When you first learn to back your car out of your driveway, perhaps when either the car or the driveway is new to you, you pay close attention. A scan would show that your brain is putting out a constant amount of energy throughout the process.

After backing the car out of the driveway has become routine, however, your brain puts out substantial energy at just two points: the beginning (the cue) and the end (the reward) in a process called "chunking."

By paying attention to just the cue and the reward, the mind saves energy (and creates that phenomenon where you know that you backed the car down the driveway but can't recall actually doing so). Your mind cleverly frees you from repetitive tasks, giving you the time and energy to think new thoughts and learn new skills.

Brains do this around actions such as driving the car. They also do it with regard to emotions, beliefs, reactions to everything from people to food and pretty much everything else a mind does in a day.

You can use this knowledge about how the brain creates habits to change your routines, but only if you're willing to carefully observe yourself and figure out what your current habits are and why they exist.

To start, observe the habit.

Let's say you would like to change or reinforce your financial habits.

I have noticed, for instance, that I often make impulse purchases online when I am bored.

The sequence goes like this: I'm a little bored, so I go online. Amazon is online, sells nearly everything (especially books, which are my weakness) and has one-click purchasing.

I'm less bored when I'm anticipating a package.

Duhigg's explanation suggests that boredom is my trigger, buying things online is the routine and the fun of anticipation -- or relieved boredom -- is the reward.

Now I can substitute a different routine that still fits the cue and creates the reward.

I might reform my habit by adopting a different routine: I'll read one of the many books I own but haven't yet read. Boredom is still the trigger, and relieved boredom is still the reward.

The middle part is different -- and it uses things I already have, not stuff I would need to buy.

If it's anticipation I want, I could assemble a dinner that takes quite a while to cook, letting me look forward to eating it. (I could use some of these cookbooks at the same time.)

You might want to reinforce existing financial habits.

Maybe you faithfully contribute to your retirement accounts.

I do.

My trigger, I think, is primarily fear. The thought of being old and broke makes me anxious.

There's no guarantee that I'll have enough money in old age, of course, but making regular retirement contributions relieves my current anxiety.

This is not a setup I should change.

If I catch myself buying books or downing more snacks in response to my anxiety over future finances, I'll try to remember that there's a more productive anxiety reliever: sending my Schwab account a check.

What are your positive financial habits? What are your less-productive financial habits? What changes would help you reinforce the good stuff and change the bad?

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