Atomic Habits: Unleashing Financial Success through Small Changes

There are successful self-help books, and there's James Clear's Atomic Habits. Countless people have recommended I read the book about tiny habits and remarkable results in the last year or two. I finally got around to it. While there were no real bombshells, Clear wonderfully describes how small changes can deliver impactful results and prescribes a system to adopt new habits (and discontinue unproductive ones). 

The Atomic Habits methodology starts with the premise that "success is the product of daily habits — not once-in-a-lifetime transformations." This doesn't jive with gurus who preach overnight life-altering changes, but it makes a lot of sense.

Why do so many new years resolutions fail? Because they are often wholesale, unsustainable changes. They're results-focused, not systems-based, so minor setbacks can quickly become total failures.

Clear didn't' explicitly write atomic Habits about personal finance, but the same ideas that help people create habits in other areas of life can help you reach your financial goals.

Clear proposes four steps in developing any habit. Let's' apply these steps to personal finance.

1. Make it Obvious — cues initiate habits. One way to cue a new habit is to pair it with a specific location and time, the implementation intention. The formula is: "I will [BEHAVIOR] at [TIME] in [LOCATION]." Create mental cues by pairing the action with a specific time and location. You probably have current habits that you can use to make a new habit more apparent, a strategy Clear calls habit stacking. For example, if you pay your mortgage on the same day every month, start making your IRA contribution at the same time. Remember, "environment is the invisible hand that shapes human behavior." Create an environment where good cues are obvious and bad ones are invisible.

2. Make it Attractive — we care about culture. Humans are social creatures, which serves us well, evolutionarily speaking. Clear rightly pointed out that "we tend to adopt habits that are praised and approved of by our culture because we have a strong desire to fit in and belong to the tribe." If the current culture you're a part of doesn't encourage the behaviors you want to implement, you should seek a new one. Find a group where the behaviors you seek are attractive; you'll find them much easier to adopt. If you're looking to gamble less, you shouldn't spend a lot of time with those who'll gamble on just about anything.

3. Make it easy — don't set yourself up for failure by overcomplicating things. I used to spend more time researching than taking action. "Perfect is the enemy of good" — it's true. The goal of this step is to remove as much friction as possible. If the ultimate goal is financial freedom, that can seem unattainable. Reduce this goal into smaller actions. Save XX more per month. Contribute XX to retirement accounts each month. Earn XX more with side gigs every week. These are achievable and easily tracked, and if maintained, will help you achieve your ultimate goal, financial freedom.

4. Make it satisfying — what is rewarded is repeated! We use rewards to teach our children and pets to behave, so why not reward yourself? Our brain circuitry responds to potential rewards. According to Clear, "it is the anticipation of a reward — not the fulfillment of it — that gets us to take action. The greater the anticipation, the greater the dopamine spike." So when you make that extra credit card payment, treat yourself to a small reward.

You can use this framework to create new habits to improve your financial life, like paying bills on time and contributing more towards retirement. You can also use the concepts to reverse bad habits like frivolous spending. Simply invert each rule:

1. Make it invisible

2. Make it unattractive

3. Make it difficult

4. Make it unsatisfying

Now you can start adopting financially healthy habits and reversing damaging ones. Here are some other gems from Atomic Habits that can help you on your journey to better finances:

• "Never miss twice. If you miss one day, try to get back on track as quickly as possible." — no one is perfect. But don't let a setback become a failure.

• "You should be far more concerned with your current trajectory than with your current results." — play the long game and worry about being directionally right, not perfect.

• "Time magnifies the margin between success and failure. It will multiply whatever you feed it. Good habits make time your ally. Bad habits make time your enemy." — like money, good habits compound over time.

• "If you want to predict where you'll end up in life, all you have to do is follow the curve of tiny gains or tiny losses and see how your daily choices will compound ten or twenty years down the line."

• "Your identity emerges out of your habits. Every action is a vote for the type of person you wish to become." — if you want to become a particular type of person, start acting like that type of person.

Creating positive financial habits is simple but not always easy. If you struggle to develop behaviors that lead to financial success, give the Atomic Habits method a try, it may be just what you need to get on the path you are seeking. 

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from James Vermillion, and all rights are reserved.