I recently attended an online class about the power of habits sponsored by Next Gen Personal Finance. In that class, I heard this statement: “Being excellent at things you do well is a habit.” I also learned that the cost of bad habits (e.g., smoking, overspending) is a lagging indicator that does not occur until sometime in the future.

In addition, I learned that we live in a very “outcome-focused” society. If people want positive outcomes, they generally have to change their habits.

Almost half of our reported daily activities are habitual and performed automatically without much thought.

I also heard an interesting analogy between habits and compound interest. The thing that they have in common is that they don’t feel like much progress is being made on a day-to-day basis but, over time, they really add up.

Laying the Positive Groundwork

Here’s an example: Someone who saves $1 a day ($365 per year) would have $56,488 after 40 years assuming a 6 percent return. Ramp the daily savings amount up to $5 ($1,825 per year) and the savings amount jumps to $282,440.

According to books about habits and empirical research, there are three components of habits (good or bad):

  • Cues: Triggers for the habit to start
  • Routines: The habitual behavior itself
  • Rewards: What people receive as motivation for performing the habitual behavior

To lay the groundwork for a positive habit, complete the following sentence:

“When I [describe cue for habit], I will [describe routine] because it provides me with [describe reward].” 

Now I’d like to share a personal story and some learning lessons from a recently established habit.

Positive Lessons Learned and Habits Made

For about a decade, I’ve had two medical issues that doctors were documenting: cholesterol levels over 200 mg/dL and borderline kidney function numbers. Nothing was done about them, though, other than “watching” my labs.

My previous two doctors barely looked up from their laptops and always seemed rushed. My last doctor in New Jersey even asked me financial questions because he knew I was a certified financial planner!

Then I found a new primary care physician in Florida. Instead of a short “in and out” visit, my new doctor spent time getting to know me. He looked at me much more frequently than at his laptop and was also very specific and direct about what I needed to do to address my two issues: Drink more water! Why?

As we get older, we are at increased risk for dehydration because the sense of thirst decreases with age

When I asked how much water, his answer was 64 ounces per day. Honestly, I was not anywhere close. Then we talked about a practical way to do this. In other words, how to ingrain drinking more water as a daily habit.

The solution: Drink three 20-ounce bottles of water per day. Seeing water remaining in a clear bottle at different times of the day is a great visual reminder to step up my intake. It is a cue, just like my trusty pedometer for daily walking.

How to Change Your Financial Habits

Below are three cues for positive personal finance habits:

  • Savings Challenges: Challenges tell you how much money to save daily or weekly. A paper form to check off deposits or an app that reminds you to save and tracks your savings are cues to ingrain a regular savings habit.
  • PowerPay: The free PowerPay program provides users with a debt repayment calendar that applies previous payment amounts made to paid-off creditors to remaining creditors. It is a cue for accelerated debt repayment.
  • Automation: Habits are easier to practice when behaviors are automated. Examples are payroll deduction for retirement saving plans and automatic portfolio rebalancing, bill-paying, and checking-to-savings transfers.
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