The Power of Habit and your Finances – Visionary Wealth Advisors

The Power of Habit and your Finances

John Fischer, CFA®, CFP® | Chief Investment Officer
May 27, 2020

The spread of COVID-19 altered life as we all know it in recent months. It has caused terrible hardship and suffering for many, and has upended daily routines and habits even for those who haven’t been directly (or negatively) impacted from a health or economic standpoint.

In the book “The Power of Habit,”, Charles Duhigg explains that habits are “the choices that all of us deliberately make at some point, and then stop thinking about but continue doing, often every day.” The effect of how the pandemic interrupted our established habits shouldn’t be understated. Studies by neurobiologists and cognitive psychologists suggest that anywhere from 40% to a full 95% of human behavior falls into the habit category.

Even on the conservative side of that spectrum, that means a large part of our daily “decisions” are basically done without actual thought — which is why a disruption to even seemingly small and simple routine behaviors can cause much bigger and more consequential ripple effects in our lives.

Leveraging a Change of Habit for Good

This might sound negative if you already have good established habits, feel happy with your routine behaviors, and have struggled to maintain your usual day-to-day during this period. But there might be some good to be found here in the face of this disruption.

Most of us don’t change our habits or behavior unless we’re forced to — but the opposite of this human trait is also true. That is, we also tend to be more open to change during times of adversity, or when our habits have been disrupted.

Let’s take a look at how investors can use this time of disruption to their advantage when it comes to their financial habits.

Evaluate Your Spending Habits

Thanks to forced shutdowns of all but essential businesses in many cities and states throughout the U.S. over the last two months, there’s simply not as much opportunity to spend (except on groceries and fixed living costs).

There’s no doubt that’s caused some temporary pain (is anyone else thinking of their favorite restaurant or coffee shop they can’t wait to get back to?). At the same time, however, this period in which we’re forced to spend less provides a valuable opportunity to assess previous spending habits.

You can take a hard look at what spending brought you a lot of joy… and what failed to do so.

By stopping to consider this, you can become a more conscious spender. You can maintain the things that bring you value, but perhaps cut back on what clearly doesn’t provide you with as much enjoyment.

Conscious spending is not about depriving yourself. It’s about eliminating what doesn’t sufficiently serve you — which, in turn, frees up more money for you to spend on what does bring you tremendous happiness. Now is a great time to take an inventory of those old spending habits that didn’t bring you much joy and re-allocate that money to areas that bring you more pleasure, including your future self.

Improve Your Savings Habits

With less money flowing out on expenses, you should have more money available to save or invest. This clearly isn’t the case for everyone, as business closures also meant layoffs and furloughs for the employees and workers of shuttered companies.

But for those who have remained gainfully employed, the power of automation can be a very powerful tool to save more and reduce the challenge of creating a new good financial habit.

Setting up automatic transfers from your paycheck to a savings account reduces the need to continually make good-but-hard choices (like the choice to save available cash instead of spend it). With an automated transfer, that wise financial decision is made for you each week or month, making a savings habit far easier to establish and maintain.

And if you already have an automatic transfer from your checking to your savings account set up? Then now is a good time to consider if you can take advantage of lower monthly expenses to use freed-up cash flow to increase your regular savings contribution. Increasing your monthly contribution to savings or a 401(k) plan, even if it’s just $100 more per month, can really add up over time.

Pad Your Emergency Fund

Record-setting unemployment numbers in April provided us all with a sobering reminder of the importance of developing the habit of building cash reserves. No matter who you are or what your goals are, having an emergency fund is a critical protection mechanism and saving up a little extra cash for a rainy day is always a good practice.

The general rule of thumb suggests putting aside 3 to 6 months’ worth of living expenses in liquid savings that you can tap into in case of financial emergency. The specific amount you should save for yourself depends on factors like your job stability, whether or not you have a volatile income stream, the number of income providers in your household, and whether or not you’re still working or retired.

Work to Build (or Fine Tune) Your Financial Plan

Has anyone else spent time in the past few weeks daydreaming of activities they miss dearly and can’t wait to continue when it’s safe to do so? So often, we fail to fully appreciate people or activities until they’re taken away from us.

If this event has given you greater awareness for and appreciation of what brings the most pleasure to your life, use that as inspiration to build a financial plan so you have action steps to take to ensure you can enjoy what matters most as we move forward from this.

Working with a financial planner can help you capture the activities and endeavors that bring tremendous joy to your life so you can build a plan that allows you to enjoy more of those. It can also help you create a better investment strategy that sets the proper asset allocation and determines under what circumstances you might consider making a change. These are invaluable guidelines when markets are turbulent and your discipline and conviction to stay the course can be tested.

If you already have a financial plan, take the time to re-evaluate your financial goals. Times of adversity often bring clarity to what matters most to us, so make sure your financial aims still align with your values and priorities.

The Power of Habit

Creating habits is a vital function of our brains. By taking rudimentary daily actions and behaviors and turning them into habits, our brains free up valuable energy to be spent on more significant challenges.

But just as we need to declutter and purge junk in our homes from time to time to make space for more valuable contents, so too do our habits need to be pruned on occasion.

By taking the time now to re-evaluate your financial habits, investors can turn these challenging times into an opportunity by improving your financial habits and reducing the friction on the path to your financial goals.

Important Disclosures:

Visionary Wealth Advisors (“VWA” or the “Firm”) is an SEC registered investment adviser. For information about VWA’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent version is available on the SEC’s IAPD website at www.adviserinfo.sec.gov

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