Create Financial Habits – The Power of Habit by Charles Duhigg

Habits can have a significant influence on our financial situation. We’ve all developed terrible money habits throughout the course of our lives. Many of these behaviors may appear to be innocuous, yet they may have a big influence on our money.
If you wish to quit a poor financial habit, you must first recognize the hunger that goes along with it. After identifying the craving, you must replace your poor financial behavior with a new habit that also fulfills that want.

The Power of Habit by Charles Duhigg is an excellent book that explains why we make so many decisions during the day. Don’t beat yourself up if you’ve tried and failed to quit smoking, eat properly, or keep to a budget. Habits wield enormous influence over our decision-making.

How are habits formed?

Understanding how habits form and using that knowledge to break poor behaviors and replace them with healthier ones is the key to developing good habits. Habits have had an important evolutionary function. They enable us to do tasks without taxing the brain.
Consider the basic act of ascending a flight of steps. How cognitively taxing would it be if we had to stop and consider how to go up every staircase we encountered? Fortunately, we have developed a strong habit that permits us to go up a staircase without hesitation.

Even complex tasks, such as inputting expenditures into an expense tracker, can eventually become second nature.
A three-part loop is used to develop habits.

  1. You pick up on an external cue.
  2. You go through a routine that corresponds to the external trigger.
  3. You will be rewarded.

If you wanted to make it a habit to log your expenditures every day, you could make a three-part loop to do that.

  1. Set the alarm on your phone for the same time every day.
  2. When your alarm goes off, you stop what you’re doing and enter all of your expenditures for the day into an expense tracker.
  3. You will be rewarded. In this situation, it might be a sense of accomplishment and fulfillment.

When the alarm goes off, your brain experiences a surge of activity as it registers the sound and determines which habit is most suitable in response to the external trigger.
Then you immediately begin the process of totaling all of your purchases for the day and entering them into your expenditure tracker. Once the habit is fully developed, your brain may operate on autopilot while carrying out this pattern.
When you complete this crucial work successfully, your brain activity increases once again. This strengthens the link between the external trigger (the alarm) and the practice of tracking your expenditure.

Cravings are caused by habits.

Receiving a reward, the third component of the habit-loop is what makes habits so effective. Your brain develops a desire for the reward. This is why changing harmful behaviors is so tough. If you decide to go out for lunch every workday, you will ultimately form a habit.

  1. During your lunch break, you notice an external cue.
  2. You go out to lunch on a regular basis.
  3. When you consume the wonderful meal that has been prepared for you, you receive a reward.

Even if you have resolved to prepare your lunch and bring it to work every day, it may not be as straightforward as you think. Your mind is still yearning for the habit of eating out for lunch.
You can have the greatest intentions in the world to save money by cutting back on spending, but in order to accomplish so, you must first break the terrible habit of paying for lunch every day.

Replace a negative habit with a better one to break it.

It makes sense to replace the practice of paying for lunch every day with a better habit, such as taking your lunch to work every day, to break the habit of paying for lunch every day. You might begin by making a list of what you want to eat out for lunch. For many people, going out to lunch with a buddy or coworker provides the company they want.
If friendship is what you need, you should establish a new habit that meets that need. Talk to a group of coworkers about establishing a pact to bring their lunches and dine together in the cafeteria. This might satisfy the want of the company while also establishing a new habit of conserving money.
Breaking any habit requires two steps

  1. Recognizing the hunger linked to harmful behavior.
  2. Find a new habit that fulfills your need while also moving you closer to your objectives and ideal outcome.

The power of small victories

Duhigg explains in his book what he terms “keystone behaviors,” which have a beneficial impact on other aspects of our life. Keystone habits are modest, easy-to-achieve acts. These accomplishments provide us with small victories that enable us to make larger changes in our lives.
It would be a difficult effort to pay off $50,000 in debt distributed over four separate credit cards. It necessitates a major shift in your lifestyle and financial management.

However, if you focus on a keystone behavior, such as tracking your expenditure, you will earn a little “win” every time you identify costs that may be eliminated.
This boosts confidence, which quickly spreads to other areas of your life. Perhaps you can use the additional money to pay down one of your credit cards.
One victory leads to the next action, which leads to still another victory. This starts a positive cycle, and the $50,000 in credit card debt is paid off over time. It all began with the modest victories given by a keystone habit.
If you want to make big improvements in your money management, choose and cultivate a keystone habit that will give you modest victories rapidly.

The Influence of Financial Habits

Human behavior is influenced by habits, which are quite powerful.
A three-step loop is used to develop habits.

  1. Cues from outside stimuli.
  2. Routines are being performed.
  3. Getting a reward

Cravings are created by habits, which is why they are so powerful.
If you discover a negative money habit, begin by determining which desires are linked with that behavior. Then, develop a new habit or routine that not only fulfills your need but also brings you closer to your financial goals.
Paying off all of your debts, for example, might be frightening. Keystone habits, such as tracking your expenditures, might offer you tiny gains early on.

These tiny victories can boost your confidence and inspire you to seek out additional small victories. These tiny victories pile up over time and have the potential to transform your relationship with money.

What are some poor money habits you’d like to get rid of? How have you been successful in developing excellent money habits? Please let me know in the comments section.

Similar Posts