The Secret to Achieving Your Financial Goals: The Power of Atomic Habits

By Esha Dhakan

TLDR:

• Removing tempting cues from your environment can help you break bad habits, such as overspending
• Adding new habits onto existing ones can help them stick
• Make the new habits you want to build as easy as possible whilst making the ones you want to break as hard as possible
• Use your mobile banking app to automate monthly savings and set spending limits
• Make the results of your habits visible so you can see the benefit of your efforts

How small habits can make a big difference

We mislead ourselves all too frequently that dramatic changes in our lives require a superhuman effort, but the effect of a modest improvement over time is remarkable. For example, an improvement of 1% a day compounds to a 38x increase in performance over a year. The point being that small changes on a regular basis add up over time.

The three layers to behavioural change

1. Changing your outcomes

Set yourself clear goals so that you know what you are working towards. For example, saving up for event tickets, a new phone or a long-term goal such as a deposit for a future home.

2. Changing your process

Build habits and routines coupled with powerful tools to work towards your chosen outcomes. For example, committing to setting aside a small amount of money and using an app to automate this, and making a monthly budget either on paper or a spreadsheet.

3. Changing your identity

Incorporate being financially responsible as part of your identity. Switching from saying that you are trying to get better with money to saying that you are financially responsible can be incredibly powerful for building good habits. This is because when you make something part of your identity, you tend to make adjustments to your actions to maintain that part of you.

This can include resisting impulse purchases for the reason that you are not the type of person who would make such purchases.

Law One: Make it Obvious

Motivation is overrated, environment matters more

Clear outlines how motivation isn’t as important as environment when it comes to building successful habits and believes that our actions are guided by cues that we encounter every day.

We are surrounded by cues that trigger our bad habits, and by changing our environment we can make it easier to establish new cues for the habits we want to build.

An example of this might be unsubscribing from email advertisements from your favourite brands as they might encourage you to make an impulse purchase.

Two more tips to set up your environment:

1. Hiding marketplace and shopping apps in folders on your phone
2. Surrounding yourself with more people who have similar goals

Law Two: Make it Attractive

Use temptation bundling to anchor new habits to established ones that come easier to you, for example reviewing your daily expenses whilst listening to music.

Law Three: Make it Easy

Change is by no means easy… but it can be made easier.

By reducing the friction associated with the habits you want to build and increasing friction for the ones you want to stop, you increase the chance of the habit sticking as it is now the easiest choice.

• Overspending online? Store your cards away somewhere hard to reach and keep your card information unsaved from your phone or computer.
• Targeted advertising a little too relevant? Block tracking cookies so the ads that show up are less likely to be things you want.

Many mobile banking apps such as Monzo, Starling Bank and Revolut now give you the option to setup spending limits and direct debits for automated savings. This removes the effort of manually transferring savings and makes it easier to build positive spending and saving habits.

Law Four: Make it Satisfying

In the beginning, you need a reason to stay on track and the easiest way to do this is with temptation bundling, but another suggestion could be adding a reward system such as more time watching your favourite show or on a hobby.

Another solution is to make the results of your efforts more visible. You can create a savings account and label it after something you want. Now whenever you avoid spending money on something unnecessary, or have some money left over from your spending limit, you can add it to your savings. The immediate reward of seeing yourself save money towards something important is very powerful and by doing so you can make it satisfying to save and act more responsibly.