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Creating Good Money Habits
How well we manage our money comes down to our money habits. In the book Atomic Habits, James Clear said, “Without good financial habits, you will always be struggling for the next dollar.”
We often think that financial success comes from some big thing that we may never have – a huge income, winning the lottery, being an expert at investing.
The truth is, your financial success comes down to your small, daily money habits – things that seem so insignificant that we often don’t bother doing them.
In this post I’ll share how you can use the habit loop to make or break the way you manage your money.
Understanding the Habit Loop and Your Money
In Atomic Habits, Clear talked about the 4 stages of a habit, which he calls the habit loop. These are the 4 stags in your brain with any type of habit:
- Cue – trigger to your brain
- Craving – motivation behind the habit
- Response – the action taken; the habit itself
- Reward – end goal of the habit
It is called the habit loop because once your brain receives the reward, it will trigger the same response the next time it identifies the cue, whether it’s considered “good” or “bad”, therefore creating the same “response” (habit).
We will dive deeper into these 4 stages and your money habits in the rest of this post.
Identifying Your Money Habits
Money habits can be helpful or unhelpful to our money goals. Here is a list of some ideas.
Helpful Money Habits
- Tracking Expenses
- Making a budget each month (and sticking to it)
- Saving for irregular expenses
- Saving for emergencies
- Saving for retirement
- Knowing the difference between needs vs. wants
- Using cash or debit card
- Automate savings
- Paying more than minimum on debt payments
- Check credit report regularly
- Setting clear financial goals
- Continually educating yourself on financial topics
Unhelpful Money Habits
- Impulse spending
- Spending more than you earn
- Buying things just because they are “on sale.”
- Avoiding financial discussions
- Keeping up with the Joneses (buying things to impress others)
- Ignoring your finances
- Ignoring bills
- Negative self-talk – “I’m not good with money.” “I can’t afford that.”
- No savings plans (waiting to have more money to save)
- No debt payoff plans
We all have different money habits that affect how we handle our money.
What are some habits that are working for you?
What are some habits that you want to change?
Breaking Bad Money Habits with the Habit Loop
To break a bad money habit, you have to first identify the cue and the craving and then replace the current response (habit) with something else.
Let’s use overspending (“retail therapy”) as an example:
Cue: Feeling stressed or bored
Craving: Shopping to forget what I’m stressed about or to keep myself busy
Response: Instead of shopping, go for a walk, read a book, take a bath, or listen to an uplifting podcast, cleaning the house.
Reward: Having that extra money in your bank account that you didn’t spend that can go towards one of your bigger goals such as paying off debt or saving for a vacation.
Building Good Money Habits That Stick
Just like breaking bad habits, the habit loop is also used for creating good habits. Setting up good habits is first identifying the response (habit) and creating cues to make it easy to initiate that habit (response).
Let’s use tracking expenses as an example.
Cue: Set a reminder or alarm on your phone in the evening to track your spending for that day.
Craving: Feeling less stressed about money.
Response: Add your expenses for the day in a budget planner, spreadsheet or app.
Reward: Knowing you’re staying on budget and not overspending.
Sometimes a reward can be a mental one, such as knowing where your money is going each day but if you need to give yourself a little more encouragement to actually do the habit then you can attach another reward to it once that habit is complete.
For example: I can watch my favorite show after I record my expenses today.
The act of recording your expenses will only take a few minutes but it can still be easily put off until later. So give yourself another incentive for taking the time to complete it.
Putting It into Action: A Simple 30-Day Money Habit Challenge
Now that you have a better understanding on how to implement healthy money habits using the habit loop, it’s your turn to put it to work!
Start with just 1 money habit that you would like to start or break and identify the cue, craving, response and reward.
Implement that new habit for 30 days. Tracking is key here! Use a habit tracker to visualize your progress.
Remember though, if you miss a day or 2 that it’s not over. Your progress is not wasted. Perfection is not the goal here. Keep going.
Conclusion
Creating a new habit or breaking an old one can be challenging because you’re trying something different. Even learning the process of the habit loop is new to you. But I’m certain you can build healthy financial habits as long as you keep showing up for yourself and appreciate the small wins.
To help you do this I created a free 30-day financial habit tracker. Download the habit tracker and focus on one habit at a time, track progress, identify challenges, and create lasting financial improvements with small, intentional actions!
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