How do we build good financial habits?

Much of James Clear’s book, Atomic Habits, is devoted to building good habits of all kinds. Let’s narrow his work down to how to build good financial habits.

To build good financial habits, we can leverage the Four Laws of Behavior Change:

We will look at each, but first, we should expand on the difference between habits and automations.

Financial Habits vs. Financial Automations

We can make many powerful and good financial habits, which can propel us to financial success. But perhaps a more robust phenomenon is automation. 

Habits are actions you repeatedly do. But they are actions you must do. If you do not do them, they don’t get done. Duh. If you have a Daily Starbucks Drink habit, it is only a habit because you physically go to Starbucks, swipe your card, and receive a drink. It may feel automatic, but it is still something you must somewhat consciously do. 

Automations happen in the background automatically. They are something you choose to do once but then happen repeatedly without your involvement. 

When you used to receive a physical paycheck, perhaps you had a habit of stopping at the bank on your way home from work to deposit the check. But if you have direct deposit, you only need to set that up once. Then every future payment will be deposited directly, automatically. 

Automate All Positive Financial Activity You Can.

Any positive financial action that can be automated should be automated. Don’t leave good financial decisions to be made every time through a habit if the decision can be made once and then automated. 

You should not have a Roth IRA contribution habit. Set up automatic contributions. If you’re paying off debt, that should be automatic. Your automatic payment should not just be the minimum with you trying to create a habit of manually paying extra. Set your automatic payment to include the extra payment. 

Habituate the Positive Financial Activity You Can’t.

There are some excellent financial actions you can’t automate. These are the ones we want to make into habits.

Suppose you want to budget. You don’t want a budget; you want to budget. You want to know where your money is going and control the flow. 

There are aspects of budgeting that you can automate, but certainly, a significant portion of budgeting must be done manually. You must set your spending targets and track your incomes and outflows to match. 

Using the four laws, let’s explore how to turn budgeting into a good financial habit. 

You don’t need to use all the laws to make good financial habits. Any one of them will help create a sound financial habit. But the more of them you can use in any one habit, the better it will stick. Let’s explore habituating budgeting with the four laws.

Good Financial Habits Law 1: Make it Obvious

Do you have any bad eating habits that occur only because you see the food? I am sometimes guilty of keeping M&Ms in my desk drawer. When I do, every time I open the drawer to get something else out, I see the M&Ms and grab a couple. 

It become easy to create a habit of eating M&Ms at work merely because they are obvious. I wasn’t thinking about M&Ms. I was thinking about taxes, investments, client communication, or a podcast idea. Anything but M&Ms. But then I see them (they’re obvious), and I eat them. I’m eating peanut butter M&Ms right now. 

When things are obvious, we do them. When they are not, we don’t. 

Budgeting is not an obvious concept. We don’t open up the pantry and see a budget. We need to make it obvious. One of the best ways we can do that is through habit stacking.

Make it Obvious with Habit Stacking

We already have many habits in life. If you want to start a new one, pair the new habit with an existing habit. The formula is:

When This, Then That.

“When I do this, then I will do that.”

Part of budgeting is setting up the initial budget. Is there a monthly habit you already do that you can pair creating a budget with?

“When I set up my monthly calendar, I will also set up my monthly budget.”

The other part of budgeting is tracking your transaction throughout the month to ensure you’re on track and not overspending. This should be done no more than daily and not less than weekly. 

So many of our transactions are automated, or any easy card swipe or 1-Click Purchase away; it’s not apparent how many transactions we’ve made and how fast they are adding up. Let’s make it obvious. 

Make Your Transactions Obvious with Habit Stacking

Tracking your transactions is the critical piece of budgeting. Let’s make it obvious. What can you stack it with? 

“When I have my morning movement, I will categorize my transactions.” 

You already have a toilet time habit. It’s probably daily. And you are probably on your phone, mindlessly scrolling social media in a vain attempt to pass the time. “Entertain me, phone!” 

Why not take that toilet time to check transactions? Open up your budgeting app, check your transactions, and categorize them. Done! No more forgetting. You can take 10-30 seconds every time you do an existing habit to create a new good one. Habit stacking.

Other Ways to Make it Obvious

James Clear covers other ways to make it obvious in his book, Atomic Habits, including:

One or more of these methods can make your financial habits more prominent and thus more doable. Read up on all of them by getting the book Atomic Habits, one of my few “must read” books for everyone. 

Good Financial Habits Law 2: Make it Attractive

Many people find budgeting about as attractive as licking a sweaty armpit. The thought of all those spreadsheets and tracking all those pennies is decidedly unattractive. You will never make a habit stick that you think is unattractive.

Some of that is just a mindset shift you can make. Some of it is changeable elements that you can influence. We can do both with budgeting. 

If you find spreadsheets unattractive, don’t use spreadsheets. Let’s find a way to make budgeting attractive.

Make Budgeting Attractive with YNAB

I use YNAB: You Need A Budget. I have for over ten years now. It’s a phone and web browser app that helps with budgeting. Slow and cumbersome spreadsheets are replaced with a convenient and sleek app that is fun to use. It has fluid animations and nice green colors for when I’m on track. It makes budgeting attractive.

Using YNAB is a choice I can make to make budgeting more attractive.

Make Budgeting Attractive by Changing Your Mindset

Many people have a bad attitude about budgeting because they don’t understand it. I’ll do a whole separate episode on budgeting some other time, but many people have the wrong view. They think budgeting is restrictive, complicated, and boring. But it’s freeing, simple, and exciting to be in control of your money. If you have a bad attitude about a good financial habit, you must first change your mind. 

Consume content on the positive action. Know what you need to know. Believe it. And then act on it. Make it attractive, and you will do the financial habit. As long as you hate it, you will never do it. There are people who passionately love every good financial habit out there. If they can love it and find it attractive, so you can you! 

He who walks with the wise grows wise, and a companion of fools suffers harm. If you surround yourself with people and messages that make good financial habits unattractive, you will never do them. 

Other Ways to Make it Attractive

James Clear covers three ways to make it attractive:

Good Financial Habits Law 3: Make it Easy

Seeking the easy way is not necessarily a bad thing. We are hardwired to seek the path of least resistance. Sometimes that makes us lazy. But sometimes, that leads us to create easier ways to do good things. If we want good financial habits, we must make them easy. 

Manually keeping a budget on paper or even in a spreadsheet is hard. 

It is hard to keep track of where you spend all your cash so you can record it in the said spreadsheet. 

If budgeting is hard, you will not do it. Make it easy with an app. There are other apps out there, but I use and endorse You Need a Budget, so that’s the only one I will talk about. 

Make it Easy with YNAB

YNAB can automatically connect to your banks and financial institutions to import your transactions. Remember what we said at the beginning? Automate all positive financial activity you can. Don’t manually try and record every transaction you and your spouse make. Automate that! 

YNAB will also automatically categorize any transactions it recognizes. Have another checking account transaction come through from your Kwik Trip debit card? YNAB knows that is fuel and will categorize it as such. Have another transaction come through for Whole Foods? Automatically categorized as Grocery.

Now your toilet time is taking five seconds to approve the transactions that have already been categorized. Now you only need to tell YNAB if that Amazon transaction was your personal spending money or your spouse’s. Easy. 

Budgeting is easy with YNAB. It’s a paid service. Pay for it! You will save more time and money using it than by not budgeting or budgeting in a difficult way. 

Other Ways to Make it Easy

The ways James Clear explains making it easy are these:

Good Financial Habits Law 4: Make it Satisfying

Teeth brushing did not become a worldwide habit until the minty flavor was added. Knowing that your mouth as clear of damaging bacteria was not enough. People started brushing their teeth after they got that satisfying minty fresh feeling at the end. We must make our good financial habits satisfying. 

Make it Satisfying with YNAB

YNAB does an excellent job of making budgeting satisfying with little animations and quotations that celebrate your budgeting activity. 

Are you staying on track? YNAB displays all green. Green like go and greenbacks, baby! As in, you are going to have more moolah if you control your cash flow through budgeting. And that is satisfying. 

Seeing your savings increasing, your debt going down, or your other budgeting goals getting reached is satisfying. Visually seeing that using YNAB makes it more so. 

Other Ways to Make it Satisfying

There are four chapters on making it satisfying in Atomic Habits

Conclusion

We can use any or all of the four laws to build good financial habits.

You can learn more about all of them in the book Atomic Habits by James Clear. You can also download a printable version of this habits cheat sheet at atomichabits.com/cheatsheet. 

Building good financial habits will build your financial success. But what about our bad financial habits? How do we use these laws to fix those? Next week we will look at how to break bad financial habits. 

This article is educational only and is not intended to be investment, legal, or tax advice or recommendations, whether direct or incidental. Again, this is not investment advice. Consult your financial, tax, and legal professionals for specific advice related to your specific situation. Never take investment advice from someone who doesn’t know you and your specific situation. All opinions expressed in this article are the opinions of the people expressing them. Any performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be directly invested in.