Master Your Habits to Master Your Finances

As you might have guessed from the previous article, I am a big fan of habits. I find it fascinating to realize that most of what I do on a daily basis falls below the threshold of my attention. In this article, I want to expand on some ideas I introduced in the previous article, which you can find here if you did not read it yet. More specifically, I want to give you an understanding of how your habits can have a big impact on your finances. But first, let us look at some key principles underlying habits.

The psychology of habit forming

Experts have identified four stages that occur each time you perform a habit. These four stages are cue, craving, routine, and reward. For example purposes, I will detail how someone might have a craving for ice cream after a long bike ride (not that it happens to me, of course, it’s just a simple example).

Cue

The cue is something in your surroundings that makes you want to do the habit. It can be the time of the day, the people you are around, or just a general feeling. For our cyclist, the cue is the tiredness when he comes back from his ride and the subsequent hunger pang.

Craving

Cravings emerge from experience. A craving is a signal that your brain tells the “rational” you that getting this thing would be very good for you, given the current environment. The cyclist, one day, had a very positive experience eating a large ice cream dipped in chocolate, which gave him energy and filled his belly. Since then, his brain associates ice cream with a load of calories to replenish his energy.

Routine

The routine is the action that you repeat. The cyclist’s routine is to go to an ice cream shop (and not any ice cream shop; he is very picky) and buy an ice cream.

Reward

The reward is the positive sensations that you derive from the routine. In turn, next time you get a similar cue, the craving will be stronger. Each time you do the routine with the given cue, you strengthen the relationship between the cue and the reward, to the point where the routine becomes automatic. Due to this reinforcing behavior, these steps form a cycle that is referred to as the habit loop.

Little Habits

In light of me mentioning the word “reward”, it is reasonable to question the whole structure I just presented to you. You might reason: “well, if everything I do automatically gives me a reward, why don’t I live in a perpetual state of bliss?” Well, you are not entirely off the mark.Most rewards are very subtle. When you brush your teeth, the “reward” that your brain interprets is the feeling of fresh mint (or whatever, cinnamon if you have no soul) after you are done brushing. Someone who runs consistently experiences the reward of the endorphins after a run. Your (my) morning coffee provides something warm to sooth our soul for another morning and the caffeine gives our brain some energy, which is certainly pleasant. Taking a second plate when you are not hungry gives you the pleasure that eating provides. Stress-shopping gives you the impression of control because you can buy whatever you want with your money. By digging a little bit, we can find that pretty much everything we do is based on a reward, immediate or future.

Modifying your habits

By pointing out these four steps, I hope to give you a bit of insight into how you, me, and every human works. Having this insight allows you to better recognize which elements in your life play which role (cue, craving, routine, reward) and act in a way to modify them for the better.

The good news is that you can modify your habits. The bad news is that since they are so deeply ingrained, they can be hard to get rid of. I would say that the thing you have less control over is the craving, and the thing you have most control on is the cue. I’ll get to practical examples soon enough.

Financial habits

I have stated without much proof that most of what we do is unconscious. You can find many examples of this in the financial habits of people. Simply think about this: why are some people wealthy? Why are some in debt? Income is not the reason why people are rich or poor. People with low income can have little to no debt and people with high income can be crippled with debt. This all boils down to spending habits. Although super vague as a term, spending habits are what steer your financial decisions. Someone who has the habit to save before they spend is going to end up with a lot more money in the tank a few years down the road. To explain my point, I will go through many examples to show the effects of some spending habits and the effect on the long term.

The Man who Never Made Lunch

Johnny is so busy that he never has time to make himself lunch. Each day, at noon, he goes to the cafeteria, grabs a $10 meal and eats it in his office while working. He comes home late, and stops by the McDonalds on the road. Factor in a total of $20 per day, at least five days of the week. This is more than $5000 on food per year, in addition to the food he (rarely) cooks for himself and more expensive trips to the restaurant. You think this is an exaggerated example? Canadians spend, on average, $200 each month on eating out. Heck, this does not even count the daily coffee some of us consume at Starbucks.

How can Johnny change his behavior to improve his finances (and health)? The problem is that he believes he is so busy that he has no time to make lunch at home in the evening. Instead, he works even more to be able to afford his daily meals. When he comes home, tired, he cannot cook, because the cupboards are empty.

He cannot change his cue for lunch, since he has to eat at some point during his day. Solving the problem involves changing his environment. If he took one hour less of work, each day, he could go buy groceries for the week and cook every night, with leftovers for the next day. It is perfectly reasonable to think that he would be able to make a $10 meal with leftovers. Voila, we just cut Johnny’s food budget in half. Of course, if Johnny has a high paying job, he can afford to eat out as much as he wants. As a student, however, you are likely to be a bit short on income, so every additional penny is worth it. Going from $100 per week of groceries to $50 saves you $2600 each year to pay for tuition and trust me, that helps a LOT.

The Latte Factor

Take Mary, who is a student in Montreal. On her way to school, she passes everyday in front of a nice coffee shop, where she stops to get her daily dose of caffeine. Moreover, she spends a few hours there each weekend to study in a cozy environment.Mary’s cue is when she passes in front of the coffee shop while walking to school. The sight and aromas trigger a craving: a nice, warm coffee. Winters are cold in Montreal (although nothing compared to Québec city, people there are the real tough ones). As a routine, she buys the coffee, and gets rewarded with the pleasant taste, warmth and energy boost. Assume a coffee costs $5 and she drinks one every day, we clock in just over $1800 each year. Oops.What can we do for Mary? To avoid the cue, she can take another route to go to the university. But that is extra hassle. What if she already had her reward? She can buy coffee at the grocery store and make herself some at home for a fraction of the price. Some coffee shops also offer discounts if you bring your reusable mug, which is another way to save money and help the environment. If what she craves is a warm drink with caffeine, she can also make herself some tea, which sells at, buckle up, about $0.05 per pouch on the bottom shelves. Now, that is an economy on consumption.

The Weeknight Regular of the Bar

Billy is divorced and lives alone. Somewhere around 8pm, each day, he wants to go to the nearby bar, where there is always someone nice playing the piano and an old man in the corner. There, Billy orders his regular drink—an old fashioned—and starts chatting with the people around. Sometimes, someone new in the crowd brings something fresh to the evening. The thing is that bills add up quick on Billy’s desk, and he has a hard time keeping up with his daily old fashioned.

Does Billy want a drink every day? Maybe. But when he is hiking with his friends, he does not even think about alcohol. Perhaps what Billy wants is company. The drink is just a means to have his place in the bar, where he can enjoy a nice conversation. To change his behavior, Billy could invite his friends over and play cards, or volunteer to meet other people. Changing the routine would give him more or less the same reward (seeing people), and would remove the added cost of a daily drink.

Finding a replacement

See, the beauty of habits is that your behavior is not set in stone. You can change any of the four elements of the habit loop to work your way. The only thing I want you to keep in mind is that you need a reward at the end of the loop for it to work. You can’t just try to cut a routine every time you see a cue. Soon enough, you will start rationalizing every possible reason why you should do the routine instead of avoiding it. Ever wondered why so few run marathons, successfully maintain the weight lost or save enough to retire at 45? This is because in every case, the task is at best daunting. That’s a mountain to climb, with painful steps. What you can do, then, is add a reward that is not (or not very) detrimental to your goals. For instance, you could watch an episode of a Netflix series, but only after you are done with your daily workout. In our context, you could tell yourself that you could watch an episode of twenty minutes for each hour you spend on applying for scholarships. Be creative!

If Johnny does not see an immediate reward for making his lunches (more time for himself, enjoying cooking), he will stop making food for himself and go back to his old habits. If Mary does not get her warm caffeine dose, or forgets that she needs to take another route, she will go back to her old habits. If Billy does not find people to engage with, he will come back to the bar.If you track your expenses, you might be really surprised by your findings. I encourage you to try it for a month; it might shine light on some patterns you didn't even know existed. Moreover, some have found that the simple act of tracking their expenses reduced their spendings, because it forced them to justify the decision to themselves before actually buying something.

Habit Ideas

Enough theory. Now, let me give you some examples of healthy financial habits that you could implement to make your life easier.

• Make rules. If you can make simple rules that are so obvious that you have no choice but stick to them, you will end up far. For example, make a list of all the things you buy routinely, top to bottom. Include saving and paying for university. At the top, put things such as your basic needs and, at the bottom, the luxuries. Now, only buy top to bottom. This way, you are sure that if you have no money left at the end of the month and still some items on the list, it is because you spent it all on things that really mattered.
• Wait before buying. This is an old favorite of financial advisors. When you think about buying something (a luxury), put it on a wishlist for 30 days. After 30 days, think if you really want the item anymore.
• Avoid the cues. If you know you can’t resist, then it might not be worth going. If each time you go to a shopping mall and get out with items you did not intend to buy in the first place, then it might be better trying to go as least as possible. Same goes for online shopping; credit cards make it so easy to pay money without even feeling like you lost money.
• Say no, then yes. If you succeed in saying no to a craving for buying something you don’t need, reward yourself and watch an episode of your favorite show. That is a nice milestone in reducing your spending!
• Be wary of “just in case.” Be careful buying things “just in case you need it.” More often than not, we don’t need it. The best example I can think of are cooking utensils. Do you really need an egg boiler, a vegetable slicer, a combined egg-and-english-muffin cooker or an automatic fork to roll your pasta? I think you only need a cauldron, a pan, and a knife…

Closing Thoughts and Further Readings

I find it hard to admit that my wannabe super rational self is not even in control of what I do on a daily basis. In this article, we saw how habits are formed and entertained through a process called “the habit loop.” This loop has four stages, the cue, the craving, the routine, and the reward. We also saw how you could alter what happens in these stages to trick yourself into spending less. The key, now, is to use a bit of introspection in your daily life. Look for patterns. What decisions are you taking everyday that have an impact on your finances? Where does your money go? Once you have this kind of high level overview, you can get down on the nitty gritty and find workarounds so that the unconscious part of your brain works for you.Although this article is a super brief overview, there are a lot of other resources out there. I would highly recommend the book Atomic Habits by James Clear for anyone interested in habit building, not just related to finances.