How do you make investing a regular part of your life?
How can you increase your odd of financial security?
The answer is make it a habit!
The past few weeks, I have been digging through The Power of Habit - by Charles Duhigg. This should be required reading for all as it really helps shed some light on how we make and break habits.
Why are we failing to consistently go to the gym, or read more, or eat better?
Why are we unable to stop eating fast food, stop spend money, or stop drinking?
Why are we unable to save every month, or make time to invest?
The answer to all of these questions is that we have instilled habits that are derailing our own success. These habits can be both good or bad and it is our responsibility to create habits for bettering our future self.
In the book, Duhigg explains a project MIT researchers conducted on mice. The mice had chips implanted to monitor their brain functions, then were tested by running an identical maze to search for a reward (cheese). The more the mice ran the maze, the faster they ended up finding the cheese. If the maze was changed in anyway, the mice slowed down and took longer to navigate. So what happened in this project that changed how the mice progressed through the maze?
The answer is quite simple; once the mice had created a "habit" of finding the reward, they could simply switch their brains off and automatically travel to the reward. If their brain had already analyzed the maze before, and a familiar trigger went off that told them they were in a familiar place, the rest of the maze was navigated on autopilot. Once the maze changed, the mice had to re-learn the environment and start fresh.
If we think about this in our everyday life you can see the parallels. If you spend all the money in your bank account at the end of every month, you might not even know your overspending. You have formed a habit of spending everything you earned for the benefit of consumption. The trigger is receiving a paycheck, the behavior is making a purchase, the reward is being able use/consume the product.
Habits are formed once our brain connects an initial trigger to a reward at some point in the future. Once the trigger is recognized by the brain, we automatically revert to completing the habit. I think if you go back to my 72 Hours post, this would be your instinctual brain taking over. The process look's something like this:
Here's an example we can all relate to; our alarm goes off, we hit the snooze button and get rewarded with another few minutes of comfort. You then over sleep, skip a morning workout, skip breakfast, etc. etc. etc....
You can literally apply this logic to any part of your day and see how it works:
- Bad day at work, crack open a beer, feel somewhat relieved
- Get paid, spend our paycheck on clothes, feel happy with our purchases
- It's lunch time, you go out to eat, feel happy with getting out of the office
You could literally do a million of these loops but the key here is to identify how you can better prepare yourself to form good habits.
So what can you be doing to create good investing habits and start securing your future?
First, you need to find that "trigger" that makes you take action. You goal should be to simply take the following chart and create a process. What is going to be your cue, then what is the routine, and what is the reward.
I have found working backwards to be most effective as it's more focused on what the end result will be:
- The goal of my new habit is: __________ (reward)
- To achieve my goal I will: _____________ (routine)
- To start my routine I will: _____________ (trigger/cue)
My reward is less financial stress, I achieve this by monitoring my investments and personal savings monthly, my trigger is simply setting calendar reminders for myself at the beginning of each month. This helps me make sure I have made any necessary contributions to retirement accounts, organized my taxes, review my investments and pay all my bills.
Now, if you need a more hands-off approach to investing for the future, look for automation. You don't have to take time out of your day to invest, instead find a way where its "out of sight, out of mind." Here are a few things to make it easy.
- Automate Your Investments: Whether it's contributing to your 401k plan at work, or setting up an automatic bank transfer each month, if you can remove the friction in making a contribution you will begin to build up a nice nest egg. "Set it and forget it" comes to mind! Just make sure you keep with it. You can use this same process for accumulating an emergency fund.
Get paid, automatically contribute to 401k plan, grow wealthier
- Increase Your Contributions as Your Earnings Grow: Pick a set period of time to reflect on your current compensation. Did you get a raise in the past 6 to 12 months? As your compensation climbs over time, so should your contributions towards your future. Simply increasing your 401k contribution by 1% each year will dramatically increase your savings at retirement. Most 401k companies provide this service for free.
Get a raise, increase 401k and savings contributions, grow wealthier
- Make Paying Off Debt a Priority: I have a few young clients who were big advocates of making their debt a priority. Simply using their increased compensation or bonuses at year end to advance debt payments, they were able to pay off their mortgage, credit cards, home equity loan, and cars before they hit 50 years old. Advancing principal payments on your mortgage, home equity loan, or other high interest debts is a great way to improve your net worth.
Get paid, pay additional principal on debt, grow wealthier
There are dozens of other options for saving but start with simple things. Your not just going to wake up one morning as a wild saver if your not already one. Instead, you will start investing and saving for the future little by little. Once the "bug" bites you and a habit is formed, you are set. You just have to start taking the necessary steps today to get started. Automating your contributions and debt payoffs are excellent ways of forming habits you won't even realize are happening.
Think about it like exercising; you will never be able to run a marathon if you just sit around and think about running marathons. You have to put the time in upfront to see the results. It takes countless hours in the gym, going for a run, and serious conditioning to make it a success!
Originally posted on www.coolcalminvested.com/
Please ignore typo’s, I will be editing grammar as I go!
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