The Power of Financial Habits

Samantha Lamas   Feb 10, 2021

Adopting mental shortcuts can help you stick to a budget.

Many financial decisions force us to balance what we want now against what’s better for us in the long term. In this classic want/should conflict, a “want” is something that grants immediate pleasure, while a “should” is something that offers benefits much later--such as healthy retirement savings.

We all know we should be doing things like saving for retirement, paying off our debt, or monitoring our spending, but these "shoulds" are hard to put into practice. Why? Because we are human. We aren’t made to think 30 years from now, even though we should be doing so.   With that in mind, how can we get ourselves to accomplish our "shoulds"? One way is to develop healthy financial habits.

Don’t Underestimate the Power of a Good Financial Habit

Our mind is constantly using mental shortcuts to make decisions, some of which come from our habits. Many of us don’t even notice our own habits because they’ve become something we do automatically. These simple habits make our lives easier by helping us combat the multitude of decisions we make daily. For example, most of us brush our teeth every morning. Instead of waking up each morning and pondering whether to brush our teeth, our habit makes the decision for us. Not only is this one fewer decision we must make, but it also may lead to better dental hygiene.

Similarly, developing the right financial habits may help make decisions easier and improve our overall financial well-being. Many people think that building a habit is all about repetition, but a few other factors must be considered:

1) The difficulty of the behavior

2) The context of the decision

3) The immediate reward associated with the behavior

Keep Your Financial Habits Simple

When it comes to building a habit, the more complex the desired behavior is, the harder it can be. For our finances, using a simple but effective rule of thumb can be a solution.

In our recent research, we began sifting through the many rules of thumb in the media to identify the rules that financially well-off people tend to use. Rules like "Always pay debt in full when possible," "Save up for big purchases," and "Have an emergency fund (to cover three to six months of expenses)" seemed to float to the top. That said, choosing a rule of thumb to follow must be a personalized decision. Try choosing a rule that fits into your lifestyle and can help you reach your financial goals.

To continue reading, please go to the original article here:

https://www.morningstar.com/articles/1022305/the-power-of-financial-habits