Every January, millions of Americans set New Year’s resolutions and over half of these individuals move on from their goals before June. For most, the blame cannot be placed on desire. We all want to lose weight and retire our credit card debt. But all too often, blame is assigned to a lack of willpower.
The great news is that 43 percent of our actions are habitual and performed without conscious thought. Creating new habits requires dozens of repetitions to convert a conscious thought into an automatic response and while difficult, habit formation is the path to accomplishing those New Year’s resolutions.
Wendy Wood’s book Good Habits, Bad Habits breaks down habit formation into a few key concepts that we will use to elaborate on financial habits:
1. No good habit formation begins with self-denial. Never buying Starbucks again in order to save for a down payment is great in theory, but nearly impossible in practice. Although short-term benefits will emerge, self-denial is most often unsustainable. There are days when our children wake us up at 4:00 AM and circumstances, such as being tired, make it nearly impossible to constantly control our impulses.
2. We all know people who have superhuman discipline and self-control. But what looks like incredible willpower is in fact an individual with good habits. Individuals who exercise regularly often do it at the same and time and place without even thinking about it. These “self-controllers” achieve their desired outcomes by not thinking. They make their actions automatic. Cue and response.
Wood used a study on college students as an example of self-control and habit. Students were shown three pictures on a computer screen: a picture of carrots, a random purple picture and a picture of M&M’s. In the first part of the study, if students moved the cursor to the carrots, they were rewarded with real carrots to eat. All the students moved the cursor to the carrots.
The same students came in the next day to the same pictures. They were given an option: they could either move the cursor to either the carrots or M&M’s and they would be given the snack of their choice. 55 percent of the students still chose carrots.
3. Habits are important. Set a goal, use self-control to begin the habit process and then get out of the way and let the automatic habit process take over. Now, how do we form good habits?
a. Context: If we want to eat healthier, we cannot have our cupboard full of snacks. Habit formation requires an environment built for success.
Let’s expand on the findings of the carrot study from above: Some students on their trip back to the study were not given the exact same choices. The carrot and M&M’s photos were in different positions on the computer screen and instead of the purple photo, a completely different picture was used. Students had to think; they had to move the cursor to a whole new location on the screen and contemplate the new image in order to choose carrots. Their brain got in the way.
The result: 63 percent of the students moved the cursor to the picture of M&M’s.
b. Repetition: Our goal is to form an automatic behavior: a habit that does not require our brains to think. In the end, we want to start a behavior before we realize we are doing it. This requires repetition.
Wood highlighted a study of students in London: It took 65 days of eating healthy food for participants to repeat the action without thinking. 59 days to have a healthy drink and 91 days to make exercise habitual. Keep in mind, these days were not consecutive. Days off and steps backward happened without derailing habit formation.
Repetition is a way to induce speedy mental action. Each additional repetition requires less mental activity.
c. Reward: Although we all do tasks out of necessity rather than joy, intrinsic and extrinsic rewards, through the power of dopamine, enable our brain to convert our repetitive actions into habits. For example, college students who exercised because it made them feel better were more likely to visit the gym than students who worked out due to guilt or to please others. The latter were unable to move from action to habit. They had to consciously move themselves to the gym.
In addition to internal rewards, external rewards can also lead to habit formation. This could be monetary benefit or even compliments from a spouse. Many times, an action will have both intrinsic and extrinsic value.
Another key component to the reward is the time between reward and action. Studies have shown that individuals who receive money for weight-loss do not keep off the weight. Many times, the money is awarded at the end; the timeliness does not match the repetition needed to form an exercise or eating habit.
In the end, insensitivity to the reward determines if a habit has been formed. Does the action continue even if the reward is not present?
d. Consistency: Consistency in this context is not about consistently performing the action. That is repetition from above. This key aspect is about having a consistent environment.
A consistent environment is the last key to forming a habit. We roll out of bed and immediately look at our phones and then walk to bathroom. When we get downstairs, we see the coffee machine and automatically turn it on. All of these clues lead to our habits of showering in the morning and drinking a cup of coffee. Controlling the contexts of our lives and establishing stable cues are critical to forming habits.
Imagine waking up each morning, driving to the gym, only to find it was in a different location each time. Now the brain is thinking and readjusting, and habits cannot form.
Now, how do we apply these principles to saving money and to our work here at MFG?
Context: At MFG we create cues for our clients. As our clients’ advisors, we create an environment where our clients discuss finances. Discussing behaviors, goals and a financial plan creates an environment necessary for our clients to make changes and be held accountable.
Repetition: Most of our clients contribute to accounts monthly. They create a habit of savings instead of thinking about lump-sum contributions. It’s much easier to max out a Roth IRA through 12 separate $500 contributions than it is to write a check for $6,000. Out of sight, out of mind. We also frequently meet with our clients to discuss changes in their circumstances and to review their financial plan. We’re repeating the same actions in a context about financial goals.
Reward: Investments go up and investments go down. But, over time, our clients remain committed to their savings and paying down debt. They are then rewarded with a higher net worth and great probability of reaching their financial goals. Seeing an investment account balance grow or a credit card balance going to $0.00 are great rewards, encouraging and verifying the work of all other principles that go with building strong financial habits.
Consistency: Pat and I are the managing partners of MFG and are here for the long-term. Thus, our clients know the services we provide and our consistency with those services. They will not wake up one day to a random new advisor or a different investment vehicle without discussions. At MFG, we set expectations up front and work hard to consistently meet those expectations.
Creating habits is difficult and takes dozens of repetitions, but it is much easier with a support system. Whether that is a friend, a spouse or a financial advisor. Create the right context, repeat the action, reward yourself and keep it all consistent.
Good luck in 2020!
