We’ve all been told that following a routine is important in many aspects of life — for physical fitness, good eating habits, solid work patterns and so on. But many experts are telling us that establishing a routine is also necessary for successful investing and building wealth.
At an early age, my mom drilled into me that it wasn’t how much I earned, but how much I saved. I’ll add that it’s not just how much we save, but how and when we save — ideally, without overthinking it.
When I think about my clients who have managed to reach financial independence, I’d say they also have very defined patterns that help them save and track their finances.
Let’s take a look at what some prominent people have said on the subject and then I’ll share my tips on how you can apply their observations to upping your own personal finance game.
To change a habit, ‘understand its structure’
The advice: In his best-selling book, “The Power of Habit,” Charles Duhigg found people who stick to a daily routine are more likely to make smarter financial decisions.
“Habits are at first cobwebs, then cables,” Duhigg wrote, referring to his observation that building wealth through investing takes time and consistency to develop good habits and see results.
Another quote, “The key to changing a habit is to understand its structure — to identify the cue, the routine, and the reward — and then alter them,” is Duhigg’s way of noting that it’s important to understand your own spending and saving habits. That helps you identify what triggers you to spend money, establish a routine for saving a certain amount of money from each paycheck and reward yourself for achieving your savings goals.
“The brain can be reprogrammed. You just have to be deliberate about it,” Duhigg wrote. This can be applied to investing by recognizing that you can change your financial habits and mindset with deliberate effort. By educating yourself about investing, setting specific goals and staying disciplined, you can reprogram your brain to prioritize saving and investing for your future.
My take: Data from Pew Research supports this. Pew found that individuals who establish consistent saving routines are more likely to build wealth over time than those who don’t. The report says that “households benefit from automatic mechanisms to generate savings. Such programs have shown promise for other types of savings and could, with appropriate alteration, offer a valuable platform for building and rebuilding emergency savings.”
Putting your savings and investing on automatic is a small change that may significantly affect your net worth over the long term. Instead of waiting to save, set up automatic savings to your important “goal” accounts. Have money transferred regularly to your emergency fund, your retirement savings, kids’ college savings, paying off credit cards and even for your next dream vacation.
‘Automatic’ behaviors carry us along
The advice: Wendy Wood, a professor of psychology and business at the University of Southern California, is the author of “Good Habits, Bad Habits: The Science of Making Positive Changes That Stick.” Wood says that habits give us the freedom to focus on other things while our “automatic” behaviors carry us along.
By establishing routines that support our financial goals, we can free up mental energy to focus on other aspects of our lives. This can be especially important when it comes to investing, which can be complex and stressful. “Small changes to the environment can lead to big changes in behavior,” Wood wrote. Wood also said that “the more we repeat a behavior, the less effort it takes to do it.” The more you invest, the easier it becomes.
My take: If you typically invest in individual stocks, consider diversifying your portfolio by also adding mutual funds or exchange-traded funds that track a broad market index. By making this a regular habit, you’ll also become more comfortable with the movement of the stock market, diversifying your portfolio and the process of investing and rebalancing. This, in turn, will require less effort over time and reduce investing fears.
Daily actions outweigh ‘once in a while’ moves
The advice: In podcaster Gretchen Rubin‘s best-selling book, “Better than Before: What I Learned About Making and Breaking Habits,” she explores the science of habit formation and gives advice for making positive changes.
“What you do every day matters more than what you do once in a while,” she wrote. That can be applied to investing by consistently contributing to your investment accounts, even if it’s just a small amount each month.
Another Rubin quote, “Happiness is not a destination, it’s a way of life,” can be applied to investing by recognizing that building wealth is not just about achieving a certain financial goal, but about creating a more secure financial future for yourself and your loved ones.
My take: Establish routines that support financial goals. Make a choice that you’re going to get serious about saving by committing to establishing good habits — including forming and following a budget, making saving from each paycheck a priority, adding to your investments regularly and paying off credit card debt.
Set specific financial goals and stick to them and automate as many things as you can, including savings and recurring bills such as insurance and mortgage payments. Meet at least once a year with your financial advisor so you can be sure to stay on track.
5 ways to build habits that improve your finances
You can develop the habits that will help you achieve financial success by consistently following these steps:
- Identify the cues, routines, and rewards that drive your financial behavior.
- Make small adjustments to your investment strategy.
- Set specific goals.
- Contribute regularly to your accounts.
- Recognize that wealth-building is a long-term process.
— By Winnie Sun, co-founder and managing director of Irvine, California-based Sun Group Wealth Partners. She is a member of the CNBC Financial Advisor Council.