Don't Set Resolutions-Create Sustainable Financial Atomic Habits

January 2023

Barbara O’Neill, Ph.D., CFP®, AFC®
Distinguished Professor and Extension Financial Management Specialist Emeritus
Rutgers Cooperative Extension

This first Small Steps to Health and Wealth^™ (SSHW) message of 2023 continues a discussion of New Year's resolutions vs. habits from the January 2020 message in the SSHW Finance Message Archive. The key take-away of that article is that change is hard when people rely on willpower, memory, and other human factors. Instead, it is much easier to take positive action on financial goals when you establish positive habits that become part of your daily routine.

Habits put solutions into resolutions. They are repetitive behaviors associated with positive outcomes. Many people have a hard time building new habits, however, especially if they are comfortable with their old ones. James Clear, author of Atomic Habits, recommends four ways to create a good habit:

1. Make it obvious (e.g., use "habit stacking" to add a new positive financial habit to an existing one)
2. Make it attractive (e.g., join a group where your desired behavior is considered the norm)
3. Make it easy (e.g., reduce friction by decreasing the number of steps involved)
4. Make it satisfying (e.g., use reinforcement by giving yourself rewards)

Clear defines atomic habits as small, repetitive actions that require little effort or motivation but can lead to big, transformative results. Many people underestimate the power of small daily improvements, such as doing 1% better every day. You can think of atomic habits as "the compound interest of self-improvement."

SSHW behavior change strategy #15 (PDF), Automate Good Habits and Create Templates, acknowledges the importance of habits and automated behaviors in changing behavior. Automation is the perfect antidote for procrastination because it reduces the number of decisions people need to make. As David Bach, author of The Automatic Millionaire, notes "Do it once- the rest is automatic!"

Some examples of positive financial habits that occur via automatic processes include:

1. Payroll deductions for a tax-deferred retirement savings plan
2. Payroll deductions, via a credit union, to build or maintain an emergency fund
3. Automatic checking account to savings account transfers
4. Automatic debits from a checking account to buy mutual fund or stock shares
5. Automatic bill-paying for recurring expenses such as utility bills and loan payments
6. Any pay yourself first (PYF) strategy where savings is deposited from gross income before it is spent (think of PYF as "a bill you owe yourself").
7. Automatic portfolio rebalancing done by some custodians of retirement savings accounts

Goals (resolutions) and habits differ in several key ways, so it is important to have both:

1. Goals provide direction and can be revised as needed. They must be achieved to consider them a "win."
2. Habits are systems-based and focus on the process of making a change vs. achieving final results.

Habits have four stages: 1. Cue (i.e., information about a future reward) 2. Craving (wanting the feeling that a reward provides), 3. Response (the actual habit performed to get a reward), and 4. Reward (the satisfaction that results from changed behavior). Example: information about retirement savings plans is a cue, feeling financially secure is a craving, signing up for automatic savings is a response, and future wealth is the reward.

In summary, small positive steps, done consistently can lead to big outcomes. Also, early success is very motivational. When people see how far they've already come, they often want to keep on going and do more.