5 Tips to help you set great financial habits for your 2020
Most initiatives begin with the best intentions in mind. As people, our desire is to do well, to succeed and do the best that we can. The key to actually obtaining this is ‘Consistency and Discipline’. Good intentions always get tested and how we respond to those tests will determine whether our intentions ever materialize into anything, or not.
Consistency is key
Practicing consistency in something new is challenging because it is directly connected to our behavior. Our behaviors are riddled with cognitive, heuristic and habitual biases. Consistency often requires working in direct contrast to the norm of how we think, act and respond to different situations. So, in essence, we are acting against own-selves, by exercising discipline. This is not for the faint-hearted, however it generally holds the greatest reward.
Zig Ziglar a great author, salesman, and motivational speaker had a number of profound quotes; however, this one is rather fitting:
“You might occasionally feel that some people are standing in the way and slowing your progress, but in reality, the biggest person standing in your way is you. Others can stop you temporarily—but you are the only one who can stop you permanently.”
Heuristic Bias, Cognitive Bias and Habitual Bias
Habits are things that we do out of routine. Some habits are harder to adjust than others. This is because some habits are deeper than simply our ability to choose differently. Here, a deeper reprogramming is actually needed and this is where heuristics and cognitive bias comes in.
A heuristic is a mental shortcut that allows people to solve problems and make judgments quickly. These rule-of-thumb strategies shorten decision-making time and allow people to function without constantly stopping to think about their next course of action. Heuristics are helpful in many situations, but they can also lead to cognitive biases.
A cognitive bias is a systematic error in thinking that affects the decisions and judgments that people make. Some of these biases are related to memory. The way you remember an event may be biased for a number of reasons and that in turn can lead to biased thinking and decision-making. Other cognitive biases might be related to problems with attention. Since attention is a limited resource, people have to be selective about what they pay attention to in the world around them. Because of this, subtle biases can creep in and influence the way you see and think about the world. These are often programmed not only through situational learning throughout life, but also by our culture, tradition and upbringing as well.
Heuristic Bias in our Financial Behavior
How does one set financial goals and maintain consistency? Most people have the best intention to save and start investing, but are waiting for their financial situation to change first. I’m going to tell you a true story as to why waiting for ‘more money’ in order to save is not the best idea- and that consistency and discipline is the better answer. Saving is a financial habit that is formed through discipline, and is held consistently when testing times come.
For publishing purposes, these two men will remain anonymous.
The first man, a truck driver for the municipal government. He had no tertiary education and started driving trucks at the age of 19. His compulsory monthly contribution to the government pension fund (GEPF) began, a humble contribution, consistently, each month, for years.
The second man, a doctor. Brilliant qualifications, abundance to save however- no consistency. This man made little-to-no contributions to retirement throughout the years.
Both men were the same age, nearing retirement when they came to us with their scenarios. The truck driver was able to retire off of his savings. Not only that but, his monthly income would be more in retirement monthly than he brought home while working. On the contrary, the doctor was unable to retire and would need to continue working into his 70’s.
It is important for us to be honest with ourselves and assess what financial habits we have in place or need to adjust. One needs to consider if the financial habits they are employing are best tailored to their lifestyle and their goals. Simply adopting what others do can be impersonal to your unique financial journey, needs and goals.
5 tips to Keep Consistency and Break Financial Bias
Consistency is hard. No matter what area of our lives; health, wealth, character, relationships or career – consistently working toward a goal that meets continuous resistance is not easy.
So, what are some ways that you can stay consistent?
- Accountability People need people. When times get tough and your eyes are the only pair on a situation, our single perspective can become untrustworthy. It is easy to stay on track with our goals when they are not being tried and tested. Having an extra set of eyes on your financial goal is a great way of having an unbiased external reminder and motivator to the bigger picture. This keeps your perspective clear and checks your blind spots. It is imperative that you choose your accountability eyes wisely.
- Eating an elephant one bite at a time. Start somewhere even if it is starting with something small. No more hesitation and waiting for the right moment. If we can be faithful and consistent with the little and stand firm when the little gets tested – we will be able to endure when it gets bigger.
- Work in percentages Set a savings amount as a percentage to your income that is comfortable for you to put aside / invest each month. As your income increases, your savings can consistently and proportionately increase as well.
- Visual achievement Set timelines for your savings and the specifics of what you are actually saving toward. If you are saving toward a holiday, a new television, that engagement ring, a new car, sending someone to school… Pick your goal and give it a timeline. Once we start to achieve our goals, motivation to do more and achieve greater starts to rise up. We start to break the idea of how daunting and unattainable things are as we start to physically see ourselves achieving it.
- Make the decision upfront and HOLD Once you have decided on the amount or percentage to save, it is important to decide WHERE you are going to save it. One also needs to understand the nature of WHERE you are going to save. If you are going to save in a bank, you will get low, but stable growth of maybe 5%. However, if you design a portfolio for your savings you will need to make some key choices.
- Choices: How much do I want this to grow by, before I spend my savings? How long am I saving for? / How much time do I have? How much movement / volatility can I handle?
It is important to make these decisions upfront, because in the moment when the consistency of our savings goal is tested; all of these factors will come into play. Set your mind upfront and keep it set until you achieve your goal.