Training your brain to build wealth on autopilot
Mitchell Barr, Client Associate
We all have areas of our lives we want to improve. You may want to lose a little weight, be a better listener, or manage your time more efficiently. We often turn to self-help methods to improve upon these aspects of our life. If you want to lose weight, you might try a diet. To be a better listener you might try to focus your attention on a person’s mouth when they speak. You can provide a personal incentive to use your time more efficiently by promising yourself ice cream after paying bills.
But the problem with most self-help methods is that they require willpower, and that means you must consciously think about them to succeed. Conscious thinking requires energy and depletes willpower, so it’s not a surprise that most people aren’t successful at sticking to a diet. If this method doesn’t work for diets, it also won’t help you build wealth, which is something many people strive for but also struggle with.
To avoid the use of willpower completely, form a habit instead. Habits are much more successful at changing our behavior because we don’t have to think about them. We use what researchers call System 1 of our brain, which takes care of most of our daily tasks on autopilot and uses much less energy than System 2—conscious thinking. Sometimes I don’t remember turning on the coffee maker in the morning because it’s so ingrained in my morning routine (See Battle of two brains).
I frequently search for behavioral aids to create better habits. Recently I participated in a program developed by Stanford Professor B.J. Fogg called Tiny Habits that makes habit formation easier than anything I’ve come across. It starts by choosing a behavior you want to change or improve. Then take that behavior and distill it down into the tiniest step or version that you can think of.
Professor Fogg wanted to floss his teeth more, so he started by flossing one tooth. The behavior must start tiny so that it requires little to no willpower. The second key to the system is to choose an anchor behavior that will trigger you to perform the new desired habit. You can frame all of these behaviors in this format: “After I brush my teeth, I will floss one tooth.” It works best if you choose something that you automatically do once or a few times a day. This provides you with a “recipe” for success.
I made a crucial mistake when using this system. I didn’t revise my habit recipes throughout the week when something didn’t work. For instance, one of my habit recipes was “After I eat dinner, I will set out my clothes for the next day.” I failed at making this a habit after two days. Why? After I just stuffed my face with a large meal, I was tired and unmotivated. This would be okay if the following behavior was tiny enough, but it wasn’t. Setting out my clothes required mental effort to pick them out, so I failed.
I later revised the habit to have a better anchor and an easier behavior. “After I brush my teeth, I will set out my shirt for the next day.” Grabbing a shirt is easier than picking out a whole outfit, so I didn’t need as much motivation. Plus, after I brush my teeth, I’m already up and walking about, so I can head straight to the closet to grab the shirt.
The last step is reinforcing the tiny behavior by giving yourself a pat on the back. After I set out my shirt, I eat a piece of dark chocolate. You want to become a Pavlovian dog. There are hidden benefits to this system as well. You find yourself forming other habits on top of your tiny habits. Now when I grab my shirt it triggers me to think about my schedule for the next day. I’m thinking about the meetings I have scheduled and mentally preparing for what I need to accomplish. This saves me energy in the morning when I’m groggy and just trying to drink my coffee without spilling it on myself.
Use habits to build wealth
Just like forming habits for better dental health or getting out the door more quickly in the morning, there are financial habits you can develop to build wealth and make better decisions about money:
After I look at my investments, I will take a deep breath.
The reason for this is twofold: 1) If your investments are up since the last time you looked, you will probably feel excited, and 2) if they are down, you may feel anxious or stressed. You don’t want to make any irrational decisions either way, so just take a breath.
After I write my name, I will write the word “give.”
You can choose any word for this one. “Give” will remind you to be philanthropic. “Save” will remind you to contribute to your savings or investments. Often when we are writing or signing our name we are spending money (restaurant checks, contracts, etc.). You can flip this negative into a positive financial behavior.
After I pour my coffee, I will think of a financial goal.
I couldn’t get through writing this article without bringing up goal planning. Wealth means nothing. Goals mean everything. Remind yourself constantly of what you are trying to accomplish. Otherwise, what the heck are we doing here?
You may also find that you have developed bad habits that follow a remarkably similar sequence to the examples above. If you have the habit “after I pour my coffee, I look at my investments,” you might be more inclined to make emotional investment decisions and lose perspective of the big picture because you look too frequently. This happens often on accident, but can be just as sticky as a good habit. Queue a new habit off of the anchor that’s causing the bad habit to take a recipe that’s already working (badly) and make it beneficial.
The key is to be creative when forming these habit recipes. Good financial planning usually does take a lot of motivation and willpower, which is why many people struggle with it. You need to trick yourself into good financial habits indirectly by starting small. If it’s not working at first, try something different and don’t give up. And give yourself some credit while you are at it! The simple act of trying to form better financial habits is a habit that will help you be successful in actually creating them. We as humans are all creatures of habit, so use that to your advantage to build wealth and get what you want.
Mitch writes the popular blog, The Money Monkey, where he focuses on common mental mistakes made by investors, how to avoid being your own worst financial enemy, and thinking about investing in new ways.