It’s been a ride, that’s for sure. Nearly everyone alive has experienced some shift in their routines this year, and we’ve all developed new habits and patterns of living to accommodate.
As we close the books on this strange and tumultuous year, I’ve put together a thought exercise, based loosely on the psychology of habit formation and goal attainment, to help you and your clients make the most of the weirdness that was 2020.
Habits grow naturally from our daily routines and are reinforced by incentives and positive rewards. Making coffee in the morning is rewarded by the caffeine kick to your brain. The act of jogging is rewarded by endorphins and self-esteem. Often, our routines crystalize into habits without our conscious knowledge since the stimulus-behavior-reward process operates independently of conscious thought. In other words, we don’t need to know we’re developing a habit for the habit take hold of our behavior.
Nearly a year into the pandemic, many of the things we thought would be "just for now" have become "just what I do now." While some of these habits are likely beneficial, such as the increases in household savings rates and investment contributions, others, like stress shopping, doom-scrolling and (insert your new bad habit here), are not routines we necessarily want to bring with us into 2021.
Our minds love to use temporal landmarks like birthdays, anniversaries and the New Year to mark time. We separate the chunks of our lives into chapters that begin and end with temporal landmarks, and researchers have found that using a significant date (like Jan. 1) can empower changes in stubborn habits of behavior. If we’re crossing a temporal threshold anyway, we find it easier, psychologically, to turn over a new leaf at the same time. Our old self fades into the past with the old year, and our new self emerges with the new one. This makes December an ideal time to put some thought into which habits we want to keep after Jan 1., and which we’d like to change.
To assist in this process, I’ve put together a simple guide that can help you (or your clients) take stock of financial habits and behaviors from 2020, and take charge of them in 2021.
Step 1. Revel in your triumphs to reinforce positive behaviors. We tend to behave in ways that are consistent with how we already see ourselves. So if you make a conscious effort to recognize the positive things you’ve done financially, then you will be more likely to do more of those things in the future.
How did you make yourself proud in 2020? Did you keep your cool during the crash in the spring? Did you jump on the opportunity to buy some assets when they were ‘on sale’ in March? Did you refine your goals and priorities to better align with your deep values? Did you pay down debt or save more aggressively?
Whatever your successes, revel in them! By acknowledging to yourself that you did these positive things, you reinforce your own sense of identity as a person who does these positive things. Then you’ll be more likely to do them again when the opportunity arises.
Step 2. Automate wherever you can. One of the best ways to solidify a habit is to make the behavior automatic. Did you find yourself spending less in 2020, allowing you to save more each month? Great! Now solidify that habit by automatically moving more of your money into your savings or investment accounts.
Step 3. Intervene in destructive habits. Not all of our new habits are good ones. Online shopping, relying on credit, tapping your long-term savings, home equity or retirement funds for nonessential spending — any of these can be manageable once or twice, but they can ruin you if you let them become a habit.
You know yourself best. What are one or two things you did financially in 2020 that you want to avoid doing again? What emotions or situations do you find "triggering"? For example, I tend to overspend on little luxuries when I am stressed or tired. It took me years to realize that a bubble bath and a novel can be just as effective for me as buying pretty things I don’t need.
Once you know your triggers and tendencies, you can introduce a small amount of awareness and attention to the decision. Turn off one-click, freeze your credit cards, do what you need to do to stop the trigger or feed the emotional need without spending as much.
Lastly, write a note to Future You to help him or her avoid repeating mistakes in the heat of emotion. If you did anything you regret financially in 2020, what do you wish you had done differently? Put the lesson to good use by writing a note to your future self. Give it to your adviser and ask that they return it to you if they see you at risk of making a similar mistake down the road.
We all want to kiss this year goodbye, but let’s heed Winston Churchill’s sage advice: “Never waste a good crisis.” By taking stock of the things you got right, reinforcing habit formation through positive self-reflection and automation, and creating targeted interventions to help Future You be smarter, you’re setting the stage for a strong start, psychologically and financially, in the New Year.
Sarah Newcomb is a behavioral economist at Morningstar Inc.
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