Breaking Bad Financial Habits
|July 5, 2012||Posted by Roshawn Watson under Personal Finance, psychology|
How often do we find ourselves in the same financial ruts over and over? With the best of intentions, we proclaim that we’ll never be in these positions again. Unfortunately, while the precise circumstances change, for the most part, history repeats itself. Our financial lives consist of patterns. That likely won’t change. After all, it is in our nature. Nonetheless, that doesn’t mean that the habits themselves can’t change. Here’s why we must break bad financial habits.
Habits Define Us
We don’t decide our futures. We decide our habits, and our habits define our futures.
One of the most powerful examples of how habits define us incidentally is about elephants. Often trainers shackle elephants when they are young with heavy chains using deeply embedded stakes. This teaches the young elephants to remain in their place. There is a good reason this is done with young elephants: by the time they are older, their strength would be powerful enough to remove the stake and walk away easily. Instead, they never try to leave, even when there is only a small unattached metal shackle “holding” them. That’s because they are no longer held by physical constraints. Instead, they are prisoners to their former programming. They developed the habit of learned helplessness.
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What we don’t realize is just how much of our lives are on autopilot as well. Neale Martin, a successful marketing consultant, argues that habits comprised 95% of our behaviors. Like the elephants, many of us do not even question our habits, regardless of proof suggesting that they do us harm or that the underlying assumptions we used in forming the habits no longer hold true. We cling to habits like our lives depend on them because there is comfort and power in the familiar and predictable. “Knowing” the results is what prevents us from touching a hot iron or skillet and plugging sharp shiny objects into the outlet. Unfortunately, that “knowing” is also what keeps from writing that book we been contemplating for years, starting that business, and asking for that well-deserved promotion. Just like failure and misery are habits, so are happiness and success.
The Big Implications of Subtle Personal Finance Habits
The implications of bad personal finance habits are remarkable; however, we rarely properly attribute blame. That’s because we often have death by a 1000 cuts. No, I am not referring to a form of Chinese torture but rather how our lives take turns for the worse by many slow and unnoticed decisions. On the surface, such decisions may appear harmless or at least insignificant, yet their impacts are grave (this is also known as creeping normalcy). The tale of the boiling frog is perhaps the best illustration of this concept. Frogs placed in a boiling pot of water will jump out if permitted. However, by placing them in cold water that is gradually heated, frogs will be slowly boil to their deaths, as they do not perceive the danger.
In reality, frog behavior doesn’t appear to follow this pattern consistently, but the point of the metaphor is still accurate. Gradual negative changes often do not elicit our responses. For most of us, we don’t necessarily do extremely stupid things in rapid succession of each other, yet we still get into major financial problems. This is often the result small decisions made over a long term, such as not carrying proper insurance or not having an emergency fund. For example, ⅓ of households would be unable to pay 1 months’ rent or mortgage if their incomes stopped. If a job loss occurs in one of these households after 35 years of consistent employment, is the job loss wholly responsible for this stumble, or could it at least partly be due to the culmination of 35 years of financial indifference? Opinions differ, so I leave that for you to decide.
The Power of Good Habits
The same cumulative effect of incremental decisions works for our good as well: whenever we see someone “suddenly” have remarkable success, we’re often witnessing the cumulative effect of years of hard work rather than an isolated event.
Case Study: Jimmie Dean
Although he has a famous last name (no relation), Mr. Dean was of modest means. The most he ever earned was $50,000 per year. I imagine he lived a quiet and unassuming life. Thus, it was to the surprise of many that he even had $2 million to donate to charity upon his death. He didn’t win the lottery or inherit money from a rich relative. Instead, he worked 33 long years as a technician and invested habitually. His seven-figure gift was the cumulative impact of his diligence.
I bring this up not to discount the power of having a healthy income. It is a fact that income is correlated to wealth; your income is also your most powerful wealth-building tool. However, sometimes we fail to capitalize on our existing incomes. We give away our power. I find it scary that the typical American household will bring in about $2 million over a working lifetime, yet many will not be able to write a $5,000 check when they retire.
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Though his numbers were not staggering, except when you compare his net worth to that of the typical American household (i.e., $77,300 in 2010 according to CNN Money), but in some ways, I find Jimmie Dean’s story even more empowering than that of runaway success stories of entrepreneurs. He used the power of habit to make himself multimillionaire with an ordinary income and ordinary job. In contrast, I have seen countless people with fabulous incomes with nothing to show for their efforts after years of hard work. While they changed their earning potential, they never changed their habits. They were still the “trapped” elephants or the “comfortable frogs.” Their pocketbooks shrunk down to their visions of their current selves.
We have the power to reject complacency. It wasn’t until Colonel Sanders received his first monthly Social Security check of $103 at the prime age of 66 that he decided that he didn’t have to subsist. He reportedly persisted through 1000 rejections before he found a restaurant willing to pay him 5 cents whenever they used his now famous fried chicken recipe, and the rest is history. Similarly, if our financial lives are going in the wrong directions, we can take courage and take charge. We can deliberately replace any bad habits with good habits. We won’t allow the pace and size of bad decisions to lure us to our slow financial deaths. We’re at least better than elephants and frogs, aren’t we?
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Image Credit: breahn