Financial success is 10% knowledge and 90% behaviours! So, with only a basic understanding of money, banking and debt, you should be well equipped to build a bright future as long as you have the right behaviours. Today we take a closer look into the money habits.
Habits of Financial Success
Financial habits explain why people make certain financial decisions. People make both rational (good) and irrational (not so good) financial decisions every day. These decisions are usually just habits which have three components: CUE, ROUTINE, and REWARD.
Cue: what triggers the habit
The first component is the “CUE”. The “cue” is what triggers or signals us to perform a routine, which includes taking no action. “Cues” come from many different sources; friends, family, neighbours, colleagues, social media, articles, television, and many others.
Here is an example of a “cue” that results in a bad decision. Your good friends, the Jones, just purchased a brand new pickup truck and everyone on the block is green with envy. The “cue” gets you thinking, “hey, I’m going to need a new truck soon”. So, before you needed it, and without a lot of thought, you go out and purchase a truck with more features. By the way, it was a truck you can not really afford, but it felt good to keep up with your friends.
On the flip side, here is an example of a “cue” that drives a good decision. The federal government discovers a study indicating citizens have too much debt. Reading this article is the “cue” for you to make an additional payment on your debt this month.
The first cue resulted in an irrational (not so good) decision to buy a truck that you could not really afford, while the second cue resulted in a rational (good) decision to pay down your debts.
Routine: what occurs because of the cue
The “ROUTINE” is the second component to the habit. This component is a natural “routine”, caused by certain cues, that are in many cases second nature to us. It is like being on autopilot, and subconsciously we may not even realize what we are doing until it’s done. Take for instance, the Jones repainting their house and you call the same contractor and have your house repainted with an even more expense paint. Without even realizing it you may be trying to keep up with the Jones. Once again to the contrary you may hear of a colleague struggling through tough financial times and you once again make an additional debt payment.
Our brains are naturally lazy and that is why you may have notice yourself turning one direction onto a road and realizing you wanted to go the other way. The way you began to return is most likely the same way you turn every other day to get to work or school. We have programmed ourselves to make decisions automatically as we have limited willpower and our brains cannot comprehend the almost infinite amount of choices we face every day.
Reward: the reason we did what we did
Finally the “REWARD” is the third component to the habit. The reward is really what we are after! Rewards range from social acceptance, a raise, a promotion, and even getting to work safely and on time. The reward is very closely tied to the ‘cue’ as once we see the cue we think of or feel the sensation of receiving the reward. This association can be so strong that our knowledge, or knowing better, may not stand a chance against the anticipated reward.
What we cannot control
We naturally have a hard time controlling the cue and reward. We hear of personal success or the grand vacation someone else took and we want that too. Cues are occurring all around us. The rewards are directly tied to cues in various circles within our lives. We can limit our exposure to cues, however, others may easily become visible which yield the same rewards.
What we can control
The routine is where we can make the change. The improvement in our financial success becomes evident when we alter the routine to achieve the same reward. Altering the routine is a challenge; it takes commitment and discipline. The challenge is finding a different routine that is triggered by the same cue that yields the same reward.
Take for example the social acceptance of your neighbours situation. We strive to be the talk of the neighbourhood, that’s our reward. However we do not need to outpace the Jones. Since someone else being praised by the neighbours is our cue and we desire to be recognized as well while making a rational financial decision, consider about the following:
- Volunteering our time to assist our neighbours in their home repairs and renovations
- Committing our time to assist in a local charity event
- Assisting in coaching a sports team in which the neighbour children play
Determining rational substitute routines takes time, so please put some thought into the habits that are undermining your financial success. Break down those habits and find better routines that allow you to achieve the same rewards that will not break the bank.