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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:

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:

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

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.