How to Replace Bad Financial Habits With Good Ones

It was Aristotle who said, “We are what we repeatedly do … Excellence is therefore not an act but a habit.” If that's true, it makes sense that if we're having financial problems, they probably stem from our financial habits.

Bad financial habits lead to overspending, too much debt, a house full of things we don't need, bills we can't pay, and low balances in our checking and savings accounts. If you're suffering from any of these problems, it's not from a lack of discipline or knowledge — it's probably because of your financial habits.

But there's good news: habits are changeable, if you use the right techniques. I've done it, and so have many others. J.D. has talked a lot about what good habits should be formed; today I'd like to look at some of the effective habit-change techniques found in my new book, The Power of Less.

Bad financial habits
It's always good to start by becoming more aware of your habits — what have you done repeatedly that have led to your financial situation? Some ideas:

  • Impulse spending.
  • Overuse of credit cards or other debt.
  • Spending without tracking.
  • Not paying bills on time.
  • Buying unnecessary items.

You might have different financial habits you want to change. List each one, and then see the next section to identify triggers for each one.

Habit triggers
Every habit has a trigger: another event that immediately precedes it and causes you to have the urge to do the habit. For example, you might exercise first thing in the morning, after you wake up — waking up is your daily trigger. You might brush your teeth after showering — showering is the trigger for the habit of brushing your teeth. You might smoke after drinking alcohol or coffee, after a stressful event, after sex.

The best trigger for a daily habit is something that happens every single day, and is already anchored in your daily routine. Some examples include waking up, eating breakfast, eating lunch or dinner, showering, brushing your teeth, cooking dinner, getting ready for bed, arriving to work, and so on — whatever is already in your daily routine.

Financial habits will have different triggers for each person, but it's important to identify those triggers. When you notice yourself doing these habits, what happened just before it? Did you go to an online site and feel a strong urge to buy something? Was it from watching television or going to the mall? You might have several triggers for your habits — write them down.

Positive habits to replace bad ones
You can't just eliminate the bad financial habits — you have to find better habits to replace them. Something has to happen when your habit triggers come up — it's best if a positive habit is put in place for those triggers.

So the next step is figuring out what your new positive habits will be for each trigger. Some good ideas include:

  • Exercise, decluttering, playing with the kids, instead of shopping.
  • Saving until you have the money for a purchase instead of buying on credit.
  • Using a 30-day list for all non-essential purchases — you can't buy something until it's been on your list for 30 days.
  • Paying bills either immediately (when you get them) or automatically online.
  • Taking 20 minutes a week to update your financial tracker/register.

Creating your new habits
Once you've identified your bad habits and their triggers, and the positive habits that will replace the bad habits for each trigger, it's time to start creating the new habits.

The best way to do this is a 30-day challenge. Tell yourself that you're going to be as consistent as possible for 30 days. Every single day, when a trigger occurs, do your new habit without fail. The more consistent you are in tying your new habit to a trigger already in your routine, the stronger the habit will be.

Other important principles for forming your new habits:

  • One habit only. Focus only on replacing one financial habit at a time during this 30-day challenge — taking on two or more habits at the same time will decrease your chances of success. You can work on your second habit in the 30 days following the first challenge, and then tackle the third, and so on.
  • Start small. Don't try to become a new person overnight. Increase gradually, after you're used to the small changes.
  • Commit publicly. Try to tell as many people as possible about your habit — friends and family, on your blog, on Twitter or Facebook, etc. This will help motivate you. Report your progress to them every day during the challenge.

Photo by Haydn Seek.

More about...Psychology

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Frugal Dad
Frugal Dad
11 years ago

We started noticing a lot of “I want that!” from our kids, and through asking them identified Disney channel (and other kid networks) was their “trigger.”. We canceled the expanded cable package and encouraged our kids to substitute their television time for reading time. I’ll spend some of that time joining them reading Leo’s book!

Trevor - 14 Year Old Money Blogger
Trevor - 14 Year Old Money Blogger
11 years ago

Leo’s books are awesome. I’m glad he is able to write a guest post here. A change of habits would be great for everyone.

the weakonomist
the weakonomist
11 years ago

My financial habits are well in order, but I have a problem with candy at work. Someone is always giving away candy, and I have a habit of going to grab a few pieces at the same time every day.

Maybe I need to identify the trigger.

Sam
Sam
11 years ago

I’m a big fan of the 30 day rule. It tskes 30 days for a new habit to become routine, why do you think rehab is 28 days, so keep working on that habit each and every day and pretty soon its routine.

PW
PW
11 years ago

I really like this post. I find the simpler the better in making such changes.

Thanks!!

Brent Riggs
Brent Riggs
11 years ago

I have found one of the strongest ways to change habits is to set up accountability. Find a group of friends you highly respect, and report to them. Let them monitor you. GOOD peer pressure…

Kris
Kris
11 years ago

My worst spending trigger was mail-order catalogs! Now I’ve gotten off many of the mailing lists, and the others go straight into the recycling bin. If I don’t see it, I don’t want it.

Gooniette
Gooniette
11 years ago

I started drooling like Pavlov’s dog just now.
Very good post!

HIB
HIB
11 years ago

I’ve never heard this quote before: “We are what we repeatedly do … Excellence is therefore not an act but a habit.”

I did notice that Obama mentioned habits quite in a lot of his speeches.

In regards to bad financial habits, I don’t think I really have any bad spending habits, per se. The thing that I struggle with is having a system of tracking our finances without writing down every expense, ala Your Money or Your Life.

Nice post!
-HIB

The Personal Finance Playbook
The Personal Finance Playbook
11 years ago

HIB – check out mint.com. It will track all of your non-cash purchases. If you live on cash alone, you’re probably stuck writing it down.

I like that habit advice. It really is easier to do something once it becomes a habit. I have so many bad habits to choose from I’m really going to have to ponder which one I choose to focus on for my first 30 days. Most of mine aren’t financial, but I’m sure I can improve there, too.

La BellaDonna
La BellaDonna
11 years ago

@Kris: I did the same thing! One night I just grabbed a bunch of catalogs and started calling them to cancel. No see, no want. Of course, as it happens, there IS a lot I want; I just told myself that once my credit card debt is All Gone, if I want to, I can request any of them again. I love you, Smithsonian Catalog *snif*. I’m really irked that Dover Books doesn’t list a number to call to cancel their catalogs! But I’m sick of the clutter, and I don’t need new Wants to add to my list.

RJ
RJ
11 years ago

Leo,

Great guest post.

Regarding Mint and tracking each dollar (the best financial habit you can have), has anyone had success with it? I tried it twice for a month at a time. For me it didn’t make budgeting any easier then an excel spreadsheet. The biggest thing was that I was spending to much time to categorize expenses…any success stories out there with Mint?

RJ

Rob
Rob
11 years ago

Great Post! Working on those habits every day until new ones are formed.

The Personal Finance Playbook
The Personal Finance Playbook
11 years ago

@ RJ. I use Mint b/c it’s free. I have heard that a lot of people like Quicken. Mint is working for me so far, but I’ve only been using it for a few months. It’s a pretty easy set up, so you aren’t exposing yourself to a very high risk. I can attest that the site is secure. You just input all of your accounts and they take care of the rest.

Of course, if you’re looking for advice or resources, it isn’t the best tool for that. But I would say it’s excellent for tracking your spending.

Carla
Carla
11 years ago

My issues are not keeping close tabs on even my basic spending and ALWAYS screwing up numbers (switching, etc) — something I struggled with for years. I have to be extremely deliberate when I do my expenses.

Kelly
Kelly
11 years ago

@RJ: The nice thing about Mint is that it gets “smarter.” It was annoying to me at first when the site would mislabel something (e.g. categorizing a transaction at a local restaurant as “Mortgage”). But if you go to “edit details” of the transaction, you can tell it to recognize that place as a restaurant in the future, etc. I’ve been using it for months and hardly ever have to recategorize anymore. I find the site really helpful.

Sarah
Sarah
11 years ago

I love this article. I have to say that I have been guilty of at least one bad habit before. As a woman, it’s the buying of unnecessary items. Yes….I hang my head in shame. However, I’ve turned it around and I no longer do this. I believe that in order to be successful you need to have every aspect of your life in balance. I’m getting there. Great article! 🙂

RJ - Our Financial Planner
RJ - Our Financial Planner
11 years ago

Thanks for the advice on Mint. I will have to try it out again, but give it a little more time.

RJ

Aman@BullsBattleBears.com
11 years ago

Its totally about that balance and working towards a bigger goal. Some people feel that small material gains now via bad spending habits may not be bad but we all have clothes in closets with tags and unnecessary electronics around the house…think of the money we waste and the better use we can but it towards. It takes time to change but is worth every effort.

JK
JK
11 years ago

Great post, I started reading this blog about a month ago and I love it. I pay for things with cash only, which makes me spend less on eating out. Seeing how much money I have left for the month, cash only system works great, but it’s hard to track my expenses. I think I will wait for 30 days and then start using my bank card, so I can start tracking my expenses. I will let you guys know how well I did. Speaking of 30 days, I wanted to cancel HBO. I even called customer service, I asked… Read more »

friend
friend
11 years ago

This post came at an opportune time for me. I was online thinking about buying a new down comforter from a catalog merchant. (On sale, and 20 percent off my whole order, too!) — but you reminded me that my big goal is still paying off credit card debt. When I do that, like LaBellaDonna says, I can think about some new things… and that should be by next time the January sales roll around. (They always do.)

Chett@5k5k.org
11 years ago

We don’t brush our teeth because we have the self discipline of the silent drill team, we brush our teeth because it is a habit we created at a specific time, that aligns with our personal goal of good hygiene.

I am working on putting together materials for this very subject of building positive habits. People who are struggling to meet their financial goals on my site say that “Need for more self discipline” is their biggest problem to overcome. Personal finance is not always about building self-discipline, but creating habits that align with your goals.

Great post, thank you.

Jill
Jill
11 years ago

This is a very timely post for me to learn from. Yes, I impulse buy and I also buy unnecessary things. I track my expenses but not frequently enough or do enough analysis. THings to work on for sure.

My triggers are primarily magazines for beauty products and clothes. I feel guilty spending money on the items I *think* I need but then I feel guilty when I cant by them either. Hmmm…the magazines should go.

Sarah
Sarah
11 years ago

A bit off the post subject, but relating to RJ’s post, I’d have to agree that the biggest thing that stops my budgeting in its tracks is categories.

I’m rather OCD when it comes to it and every time I run into a purchase that doesn’t fit the categories I’ve created I get frustrated by it and half the time give up for a month or two. Alternatively I’ve tried making the categories more general and then feel like I’m not doing useful tracking of expenses.

Has JD (or anyone else) written anything about this part of the budgeting process?

BPT - MoneyChangesThings
BPT - MoneyChangesThings
11 years ago

For you catalogue cancellers: great strategy. They steal so much time from you, without your inviting them into your home!
Use http://www.catalogchoice.org
It’s free – you input the catalog, customer number, and code, and they keep track of it for you. If you’re getting multiples to slight variations of your name, eventually you can input them all. It’s there for you to check on. Takes about 8-10 weeks for the damn things to stop. Some days I barely get any mail now!

J.D.
J.D.
11 years ago

@Sarah (#24)
I haven’t written about choosing budget categories, though I’ve had a couple of requests. I agree that it’s an excellent topic. I’ve copied-and-pasted your comment to my text editor as a prompt to write about this in the future.

Kelly Rusk
Kelly Rusk
11 years ago

This is great advice! One thing I noticed I was doing was a lot of “window shopping”. Going to the mall because I was bored–with no intention of buying anything, but inevitably, I always did. Now I stay out of the mall unless I need something!

Esperanza
Esperanza
11 years ago

@mint.com

I love mint.com but lately I have been having several duplicate transactions and its very frustrating. Anyone else having similar problems with that?

Craig
Craig
11 years ago

It’s all about having the mindset and then putting it into place. I have been able to stop my impulse purchases and have bought more used books opposed to new. Little things can add up quickly, and everyone can do it. It’s very simple, just takes patience.

La BellaDonna
La BellaDonna
11 years ago

Sarah, I don’t know if it’s any help to you, but I created a simple CHART for myself in Word. Nope, not Excel, not a fancy specific money expenditure program – just a chart, a bunch of columns. The categories across the top? Food, Doctor, Fabric/Yarn, Other and Clothes. Down the side, the days of the month (and I save the document as a new version for the next month). Yes, it’s a little idiosyncratic, and all my major expenses – mortgage, gas, electric, etc., are paid and carefully labeled under the Other column. I may break it down and… Read more »

Neal Frankle
Neal Frankle
11 years ago

I love the post and the comments.

I’ve found that often, folks don’t even know which of their habits are bad! A thorough assessment is very important. Find out how much you really spend by simply tracking the total withdrawals from your checking account over the last 36 months and average it out.

Its a simple exercise but it will astound you.

Kim
Kim
11 years ago

Poster #25 – thanks for supplying the catalog choices web addy. (I was about to do that). I recently discovered the site and it is very easy to use. I look forward to a future of a less-cluttered mailbox. (In 8 – 12 weeks).

Alisa
Alisa
11 years ago

To fight a shopping habit, I’d suggest to write down the things that you want to buy into a planner or bookmark it online, or if it’s in the catalogue, add to the page one of those Lucky mag stickers and put it aside to return to it later. You won’t believe, but I found that certain things that I wanted to buy so badly did not pass a time test.

TStrump
TStrump
11 years ago

I’ve made a similar 30-day challenge with respect to my credit card – I’ve made a committment to leave it at home.
Too easy to make impulse purchases.
So far, so good, but I’m going through credit card withdrawal!

Nancy L.
Nancy L.
11 years ago

When I started getting my finances in order, I began in very small increments. The first step was to get to a point where I was no longer putting anything on my charge card. The second step was to achieve a budget where I was ending the month with a positive balance. When I accomplished those two steps consistently for six months, then I allowed myself to refinance the credit card debt. (I wanted to make sure I wouldn’t just go right back out and run up a balance again) Next I began refining my budget to be ready for… Read more »

Michael
Michael
11 years ago

Sarah,

My wife and I use a category called “Grease” every month. We usually budget anywhere from $50.00 to $75.00 in this category. When we need something that was not anticipated at the beginning of the month and is not an emergency expense, we place the cost under Grease. We use a homegrown Excel workbook so we have a comment box on the amount under Grease and indicate in that box what was purchased to keep it simple.

Sherry
Sherry
11 years ago

I started very small – both for health and financial reasons, when I stop by a fast food place or other restaurant, I do not order fries or a similar side that is extra. I also focus on ONLY value menu items. Instead of spending 6 or 7 dollars at Wendy’s or Jack In The Box, for example, I end up spending between only $1.5 and $3. I am also working on not eating out as much – which I have been able to do. I found that I am saving a good bit of cash, as well as maintaining… Read more »

chacha1
chacha1
11 years ago

catalogchoice.org – helped clear out my mailbox, too! And I cancelled all magazines except those related to new business (Fast Company, Men’s Health, Women’s Health, and Yoga Journal) and one that just makes me feel good (Ode). But the best impulse-shopping-killer for me was living four years without a car. I walked to work (yes, in Los Angeles!), left my credit cards at home, and let me tell you, that works. Could have walked home via Anthropologie, Crate & Barrel, Williams Sonoma etc but who wants to carry shopping bags for a mile? I now have a car again, but… Read more »

Amber Weinberg
Amber Weinberg
11 years ago

Great tips. I find organization of your entire household to help too, if you’re not staring at all that clutter, you don’t get as many impulses to go out and buy things for the house – and it also insures you never buy more than one of something!

Sherry
Sherry
11 years ago

@Amber – you are so right! I cannot count the number of times over the years I have had to buy something I already had because we could not find it! I am in the midst of organizing my kitchen. We needed new dishes – so we picked out cheap ones at IKEA, and BEFORE taking them out of the boxes, I gathered up the old mismatched ones that were still good, filled a box and gave them to my son’s best friend (he just got his first apartment and needs many basics.) I do believe that “retail therapy” can… Read more »

Claire at Choyster Cash
Claire at Choyster Cash
11 years ago

Thanks for posting this – I’m sure we’re all eager to read what our favorite Zen guru has to say on this topic;)

Johnny
Johnny
11 years ago

Great tips! I’ve used the 30-day list myself to great effect. Several things that I thought I “needed” ended up being temporary impulses. Putting the purchases on hold really helps separate the stuff I truly want/need from the unwise impulse purchases.

thomas
thomas
11 years ago

impulse spending is such a big one, whether it’s the $1 gum in the checkout line or the new bluray player because the current dvd player skipped a track.

Jeremy
Jeremy
11 years ago

Yes, very good article. Discipline is a great tool to get you started, but you’ll fall off if you don’t move to habit or making it something you desire quickly. I’ve written about that on my site as well.

I especially appreciate the easy step-by-step solution. It’s pretty easy to get started, and manageable since you’re only facing one change at a time. I’m looking forward to trying this out, though with my list, I’ll still be at it years from now!

PennySeeds.com
PennySeeds.com
11 years ago

I stopped buying anything with cash to help me better keep track of my finances. Cash tends to disappear from my wallet without rhyme or reason.

However, my debit/credit card spells out exactly what I’m spending on. I’ve even switched to using just one card for my main purchasing.

I use my credit card for the cash back, and then immediately pay it from my bank account. This way all the spending is listed together, and I get a bonus. 🙂

Mary
Mary
11 years ago

Great post. I also want to recommmend “Your Money or Your Life” by Domingues and Robbins which was re-released in 2008 as a very inspirational book on finding one’s level of “enough” — both financially and with one’s time.

T.
T.
11 years ago

For me, the 3rd habit has always been a problem. I spend without knowing how much I have left (although not impulsively). Especially for groceries this makes a difference, the brief times I have tried it. The funny thing is, I know my trigger for this. When I think about money (whether I have $8 or $8000 in my account) I get nervous, I never want to check my balance or know how much is in there. The problem there is that knowing I have a problem I start worrying, I don’t want to worry, so I stick my head… Read more »

Alexis
Alexis
11 years ago

Oops! Wish I had seen this before I spent $150 on a new handbag. Oh well, I like to think of that as an “investment bag.” I will likely use it to carry all of my sack lunches for the next two weeks…

Urban Frugal
Urban Frugal
11 years ago

Bad financial habits cannot be changed like going on a crash diet. Good financial habits are like healthy eating habits, there is room for a treat or two in a budget as long you don’t go overboard. Once in a while, a splurge is acceptable, but if you have to live too close to the belt (like having a strict calorie cutting, depravation diet) you will be unhappy and rebel – going back to the old ways. Even though I consider myself very frugal, I always reassess my frugality and see what is working and what isn’t. Then I work… Read more »

Sancy
Sancy
11 years ago

Reading the comments here made me indulge in one of my favorite “what if” scenarios: I live in a community where the economy is based on tourism. It seems that all there is to do here is shop. If we are not consuming, there is nothing to do. There are very limited cultural/art events, except when the tourist season is high and then those events are geared specifically toward the tourist crowd (retirees and “families”). Everything done is based on consumption. A beautiful community art show was turned into a “Family event” with lots of kid consumption, for example, a… Read more »

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