Forget willpower: Why habits are the key to achieving financial goals

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Forget willpower: Why habits are the key to achieving financial goals

What's the value of $20 per month?

It's not a trick question. Obviously, the simple answer is $20. But if you're talking about a 21-year-old earning $50,000 who salary sacrifices $20 per month to her super, the value is $10,077, the extra amount she would have in her super at retirement age, according to the Australian Securities & Investment Commission retirement planner.

But the real value of that $20 is that it establishes the habit of saving. It's that first step that makes the next one easier to take. The study of habit — how to break bad ones, build good ones and leverage them to achieve goals — is flourishing.

Much of what habit researchers are discovering runs counter to conventional wisdom about getting things done.

Many people believe they must set big goals and work tirelessly to achieve them. That can work, but may instead lead to failure. Big goals are rarely achieved quickly, and it's easy to lose interest and commitment along the way.

The new science of habit advises the opposite strategy. As the Stanford University behaviorist BJ Fogg explains, "Only three things will change behavior in the long term.

Option A. Have an epiphany
Option B. Change your environment (what surrounds you)
Option C. Take baby steps"

Using this way of thinking, economists have discovered that putting healthy choices such as carrots at eye level in school cafeterias will do more to get children to eat vegetables than a million lectures on the evils of junk food. By focusing on habits, instead of goals, you set up systems that dramatically increase your odds of achieving the goal.

How can you apply habit research to your financial life? Start by identifying money habits you want to change, then implement a system to get there by changing your environment and taking baby steps.

Here are few ideas to get started:

Let's say you are spending too much on your credit cards. You can tackle this in a number of ways.

One principle of breaking habits is to make the activity harder. Someone trying to kick the sugar habit, for example, might start by keeping it out of the house, so that it's an occasional treat that requires going somewhere to indulge in.

You could try leaving your credit cards at home, or spend only cash on purchases. Some researchers believe that because cash is such a tactile experience, the brain pays more attention to it, making people less likely to spend. But even a baby step, such as wrapping your credit cards in a piece of paper, may be enough to remind you to walk away from the purchase.

A more tech-oriented person might benefit from an app that regularly updates you on how much you are spending on sneaky expenses such as eating out. The key here is to figure out what works for you.

Scheduling activities also can work. If you want to save money on eating out, start with a goal so small that you will be able to achieve it no matter what. You could commit to taking your lunch once a week. Then, add the required items to your grocery list and schedule time in your calendar to pack it.

Automating a habit also pays big dividends. People have written books by deciding to write, say, 1,000 words every day at a certain time.

Many ways to automate the saving habit exist. One of the best is dollar-cost averaging, which involves investing the same amount of money into, say, shares or managed funds at regular intervals over a long period – whether market prices are up or down. This takes the emotion out of investing, minimising the risk that you will panic and sell when share prices fall. From a habit point of view, it keeps you on track even when motivation flags. That's worth a lot.

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Source : Vanguard April 2019

By Robin Bowerman, Head of Corporate Affairs at Vanguard.

Reproduced with permission of Vanguard Investments Australia Ltd.

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