How to Build Good Money Habits You Actually Follow
Reaching your financial goals starts with good money habits. Improve your finances by understanding how habits form and building on what you already do.
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Habits are behaviors that help us move through life with as little effort as possible. Creating good financial habits isn’t always easy—and the consequences of bad habits can sneak up on us. The key is understanding how habits work and finding ways to make them stick.
Charles Duhigg’s The Power of Habit and James Clear’s Atomic Habits are two excellent resources that explain the science behind habits and offer practical strategies to help you make lasting changes. In this article we’ll talk about how you can apply these principles to your finances.
Understanding How Habits Work
In The Power of Habit, Duhigg introduces the concept of the "habit loop," which includes a cue, a routine, and a reward. The cue is what triggers your habit, the routine is the action you take, and the reward is what you get from completing the habit. You can create new habits or change old ones by recognizing and working with these elements.
James Clear’s Atomic Habits builds on this idea by focusing on small, incremental changes. Instead of trying to make big changes all at once, you can make 1% improvements that add up over time—similar to how compound interest works on savings and investments. It's also important to see yourself as the kind of person who embodies the habits you want to adopt.
Steps to Build Good Habits
Habit stacking, a strategy introduced in Atomic Habits, is an effective way to adopt new habits. This technique involves linking a new habit to something you already do regularly. Stacking a new habit onto an existing one makes it easier to adopt and maintain because you don't have to rely solely on your willpower.
For instance, if you already have a routine of checking your email every morning, you can also check your account balances and review the previous day's transactions. This may help you keep your budget and spending on track. The existing habit of checking your email acts as the cue, and the new habit of reviewing your account balances becomes part of the routine.
- Start with the habits you already have: Look at your current routines and habits that are obvious and already firmly established. Consistent habits make the best anchors for new habits. For instance, you may check your bank balance and schedule upcoming bills every payday after you review your deposit.
- Keep things simple: If the process is too complicated, it’ll be harder to stick with. For example, instead of trying to overhaul your entire budget every month, you can start by reviewing just one or two areas of spending. Or, you can automate payments and set up spending alerts to help you stay on top of your budget.
- Make good habits part of who you are: Good habits are easier to stick to when they're part of your identity. For example, instead of saying, "I want to save money," say something like, "I'm disciplined with my budgeting and spending." Replace "I want to be better with money" with "I am continuously learning and improving my financial skills."
- Focus on the rewards: We create good habits because there's an outcome we want to achieve, like improving your FICO® Score for access to better interest rates. Reminding yourself of your bigger goals can reinforce your commitment. As you adopt new habits, regularly review your progress to see how your habits are paying off to help you maintain your efforts.
- Adjust as needed: If a routine isn’t working, don’t be afraid to change it. It might take a few tries to find the right combination of habits that works for you, and that’s okay. The important thing is to stay on-track.
Creating good money habits into your life doesn't have to be hard. The important part of creating lasting change is consistency and patience. Over time, small steps taken regularly can lead to major financial improvements.
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LaToya Irby is a financial writer with over 14 years of experience. She's been quoted and published as a credit expert in several major publications including USA Today, U.S. News and World Report, TheBalance.com, and The Chicago Tribune.