The close of one year and start of another are times of reflection and commitment to change. Oftentimes that change takes the form of a resolution — a commitment to a change that may be challenging or difficult. Resolutions can be physical, financial, or mental, but they do all have one trait in common.
Resolutions share a common characteristic of failure, with more than 75 percent of resolutions being abandoned before the end of February each year. That’s not a track record of success.
Change can be positive and noble and empowering, but we don’t appear to do well forcing change upon ourselves — at least more than 75 percent of us don’t. Perhaps we need a more realistic approach.
Improvement in the Financial Realm
Most people have an idea of where they would like to get better financially. Perhaps they want to save more, build for retirement or for education needs, or just be more organized and disciplined financially. Maybe even make financial resolutions to improve them.
Positive change in these areas doesn’t require unwavering commitment and steely resolve, although neither of those are detriments. Positive change in these areas merely requires a shift in habits. By doing things a little bit better — consistently — we build better futures for ourselves and our families. It does require consistency, but doesn’t need to require hardship.
Financial resolutions often seem very attractive before we start them. We see ourselves valiantly fighting for our brighter futures — but then reality hits back. We face a conflict with keeping the resolution or meeting another need. And once the resolution is broken, it is easy to walk away.
The long-term rewards don’t motivate near-term behavior changes. That’s why we need to work on habits.
There are four key areas where tweaking our habits can make a big difference. And we don’t need to suffer to make those improvements.
Intent and Planning
One of the most life-altering money habits a person can adopt is to be intentional with their money. It seems intuitive; if we want to do our best, we should always select the proper choices.
Reality, however, often has different plans.
People can choose to be in control of their finances or to have their finances be in control of them. Failing to consciously choose often results in the latter happening: people become controlled by their finances.
Overall we’re good at this with some purchases. We tend to put a lot of research and analysis into things like buying a home. We may not always make the optimal decision, but we try to at least make an informed decision.
Applying this thinking to smaller decisions makes for big improvements. Acting intentionally with money by meal planning, trip planning, or making some sort of analysis to routine financial decisions yields big results.
This planning can have a compounding effect. When I meal plan, I eat better while also spending less on food. I also save time, a lot of time.
I save time by making fewer trips to the store — which also saves me the cost of those trips. I waste less food. And I spend less time cooking because I am working strategically and not reactively. And I’m less likely to impulsively spend money on takeout. There are many tangential benefits to that one simple act of financial resolution.
Avoiding Emotional Purchases
Emotional purchases aren’t necessarily bad; emotion adds flavor to our lives. We can use that to our advantage in selecting colors and designing our spaces.
It can also lead us to make decisions that aren’t in our best interest. We may see a tool or pair of shoes that we really really, really want — but that we also don’t really need. The pull of emotion may lead us to spend when we would be better off not spending.
As a species, humans are not good at resisting temptation. Advertisers and marketers know this. They’re very good at getting us to part with our hard-earned money.
One strategy to avoid impulse purchases is to put a space before any financial decision.
For example, you see something that you really, really, really want. Instead of buying it on the spot, wait 48 hours and see if the want subsides.
Take this time to consider whether this is something you need, or if perhaps something you would be better without — and keeping the money instead.
It’s not just big-ticket items that we need to watch out for. Little things add up, and impulse decisions can derail an otherwise solid budget. Being aware that we are being pulled by emotion is a big part of the battle. Then we need to build a habit of making the right decision despite the emotional pull.
Managing Taxes and Other Windfalls
One of the most common financial errors is blowing your tax refund. Many people are overwithheld, which causes them to get large or largish tax refunds each year. They make an interest-free loan to the government, when those funds could instead be earning for them. That’s the smaller mistake.
The larger mistake is then using that refund on a want. Most people couldn’t tell you what they did with their refund from five years ago. They got something they wanted, but probably not something they needed.
We’re not good at depriving ourselves, and we don’t need to be. But we know that we do better when we are intentional with our money, and this is clearly one of those examples.
One strategy is to commit the majority of your tax refund, and any other windfalls, toward your long-term goals. Perhaps three-fourths toward the future, and a fourth toward today. That still gives you the thrill of having some extra cash to spend, but lets you make some progress toward something more meaningful as well.
Ideally, most people should be allocating 100 percent of their windfalls toward their futures; they’ll need it. But allocating the majority toward the future is a lot better than blowing it all on some toy or entertainment.
Deal With It
There are many people who have some sort of financial skeleton they’re avoiding dealing with. It might be an old debt or not making any retirement savings, something that they know in their heart needs to change, yet they avoid it.
Now is the time to deal with it. If you have a financial issue, whether an unpaid debt, unpaid or unfiled taxes, any outstanding issue, the best thing to do is to deal with it ASAP. It won’t get any better by itself.
Then there’s the step to take to help keep problems from recurring and to get yourself on track for the financial future you want. That step is to automate.
If you automate your savings, you will save. If you automate your bills, you’ll pay them. If you automate contribution increases, they’ll happen.
Automation can make your financial life easier and better at the same time. It is one step that pays ongoing dividends. You invest a small amount of effort to automate and then far less time to check that things are doing what you want, tweaking them as necessary. Automating saves you time and also improves your finances. It is a big win-win.
The Bottom Line
Life has challenges. There’s no getting around that. We can, however, be prepared for unexpected financial challenges and make financial decisions that set us up for our best financial futures.
The last couple years have brought many challenges for many people. There are some new challenges on the horizon, such as the potential for a bout of protracted inflation. There’s no silver bullet for making the future all rosy and nice. But we can make it as good as it can get financially. It doesn’t have to be hard. Habits beat financial resolutions over time.