Millions of people resolve to improve their finances at the beginning of the New Year.
But just 8% of people achieve their New Year’s resolutions. That's because most resolutions are unrealistic.
They're too big, too vague, and too dependent on unreliable willpower.
Financial resolutions face an extra challenge. They ignore the keystone habits required for long-term financial success.
The keystone habits of personal finance are surprisingly simple:
Track your spending and review it at least once a week.
Make a simple budget and review it least once a month.
Once these habits are in place, all other financial resolutions are easier to keep.
This includes the golden rule of personal finance: spend less than you earn. After all, you can't follow that rule until you actually know what you spend every week.
What are keystone habits?
A keystone habit "is a behavior or routine that naturally pulls the rest of your life in line." They are the most important habits you can make.
As Charles Duhigg writes in the bestselling book The Power of Habit:
Keystone habits support other habits.
Keystone habits provide “many small senses of victory.”
Keystone habits give you confidence and motivation to do more.
Keystone habits are different from regular habits because they have ripple effects which help change your behavior in unexpected ways.
"When researchers look at how people change their habitual behaviors, they find when some changes occur, it seems to set off a chain reaction that causes other patterns to change as well.
The power of a keystone habit draws from its ability to change your self-image." - Charles Duhigg, The Power of Habit
How do keystone habits support personal finance success?
The most popular financial resolution for 2018 is to spend less money. Others include paying down debt and saving for retirement.
But until you've developed the keystone habits of tracking spending and making a budget, all other resolutions are doomed:
It’s impossible to save money if you don’t know what you spend.
It’s impossible to systematically pay off debt when you don’t have a budget.
Likewise, it’s not always possible to save money or pay down debt because of life circumstances.
Making financial resolutions without keystone habits in place creates a cycle of failure. And as Ramit Sethi notes, “Failing at our resolutions has implications…we start to distrust ourselves.”
The good news is everyone can make a habit of showing up to review spending and a simple budget. You don't need money, credit, or even much time.
A crash course in making keystone financial habits
Research shows resolutions stick when they become a habit.
1. Set simple, specific goals.
There are many popular goal-setting strategies. But when it comes to developing new financial habits, it's best to avoid jargon and make your goals as simple and specific as possible.
A goal of "becoming more engaged with my money" sounds simple. However, that goal isn't specific. It's also often surprisingly complicated.
The same is true of "save more for my emergency fund," and even the golden rule of "spend less than I earn."
The simple-and-specific version of the goals suggested in this article are:
Create a new habit of showing up to looks at spending once a week.
Create a new habit of showing up to look at a budget once a month.
2. Take the smallest steps toward winning your goals.
Small changes become automatic habits faster than large changes. There are many sources for this insight:
Gregory Ciotti refers to small steps as micro quotas that can work to macro goals.
BJ Fogg calls them baby steps in his influential Tiny Habits program.
The smallest steps toward creating the keystone habits suggested in this article are very simple.
All you need to do is show up to look at your spending at least once a week, and show up to look at your budget at least once a month.
At this point, you're not actually doing anything besides looking at your spending and budget. You're not categorizing, analyzing, or updating anything. That's because those actions aren't your goal.
Your goal is simply to make a new habit of showing up to engage with your money week after week.
These steps may seem too small to put you on the road to financial success. But as BJ Fogg says, “trust the process.”
Remember, small steps build momentum toward long-term progress.
3. Be as specific as possible when and where your tiny steps will happen - and put it in writing.
Deciding in advance when and where you will take specific actions to reach your goal can double or triple your chances for success. —Heidi Grant Halvorson, Columbia University
One of the most powerful tools for achieving any goal is to write down a very simple plan about when and where you'll take steps to work on it.
Research shows writing down an intention with a "when and where" formula doubles a person’s likelihood of achieving their goal. It goes like this:
“I will ____ on [DAY] at [TIME OF DAY] at/in [PLACE].”
- “I will open my transactions to look at my spending for five minutes on Thursday morning before I go to class."
- "I will open my budget to look at it for 10 minutes on Sunday night before I watch TV."
- “On Monday morning before work, I will open my Tiller sheet and look at 20 recent expenses."
The most important thing is writing exactly when and where you'll review your budget and spending.
“Specification in planning is associated with a greater likelihood to perform the behavior.” - CHIRr overview of behavioral intention research
4. Create a trigger.
It's also helpful to create a trigger that reminds you to take action. For most people, a digital weekly reminder in iCal, Outlook, or Google Calendar is effective.
5. Anticipate setbacks with a backup plan.
According to Kelly McGonigal, the number one reason people fail to stick with new habits is because they don’t have a plan for failure.
If you anticipate failure, you can more easily rebound and get back on track.
This is even true when it’s harder than expected to meet your goals.
A simple way to make a backup plan by writing it down in this formula:
“If ____, then ____.”
If I haven’t shown up to look at my spending on Thursday, then I will look at my spending on Friday before making dinner.
If I haven’t looked at my budget on the last Sunday of the month, then I will look at it on Monday morning before going to yoga.
If you find you consistently default to your backup plan, consider that your new plan. If you never want to look at your budget on Sunday, but find it easier on Tuesday, then update your plan and do it then.
6. Extra credit: recruit a friend.
Many people find keeping their goals is easier (and more fun) when they're working with a friend or partner.
This study showed that “people who wrote down their goals, shared this information with a friend, and sent weekly updates to that friend were on average 33% more successful in accomplishing their stated goals than those who merely formulated goals.”
You’ll get positive, motivating social support from your partner. You might also get motivation from fear of embarrassment if you fail to follow your plan.
Goal: Track Your Spending and Look It At Least Weekly
“The best first step you can take to improve your finances is to track your spending.” - Libby Kane
Tracking and reviewing spending is the first step toward a better financial life. That's true regardless of income, credit score, or personal debt.
It’s extraordinarily easy to spend more than we intend to every single day. And when we don’t understand where our money goes, it feels like it goes everywhere and nowhere all at once.
Tracking spending gives us confidence about where our money goes. But it also triggers better spending and saving habits. Awareness of spending will transform your relationship with money.
It’s simple to track and review spending if you put everything on one credit or debit card. But most people use several cards and sometimes pay in cash.
With multiple accounts, choose an app or service that automatically imports all your financial information into one dashboard.
(Or you could keep your paper receipts, but we’re trying to be practical here.)
If you’re a regular reader of our blog, you’ll know that many of the most financially engaged people use spreadsheets to track their spending. Others use apps.
Popular platforms include Tiller Money, YNAB, Mint, Quicken, Personal Capital, and many more (see links below).
Above all, look for a service (or services) you’ll actually use.
How to Review Spending
To misquote G.I. Joe, tracking spending is half the battle. You also need to review your spending.
Some people (like writer Carl Richards) review their spending just once per month. But if you’re trying to make new financial keystone habits, that’s too infrequent.
Plan on showing up to look at your spending at least once per week.
If you consistently look at your spending, eventually you'll begin to spend less – and spend smarter.
Best Personal Finance Software Apps of 2017 - WalletHacks.com
Top 4 online budgeting tools to better manage your money - Clark.com
Best Apps to Help You Keep Track of Your Money - Quicken.com
A Way to Automate Your Budget Spreadsheets - RockstarFinance.com
Track Your Cash Spending With Your Tiller & Google Sheets - TillerHQ.com
Goal: Create a Budget and Review It At Least Monthly
“Budgeting is what saved my finances and what got me out of debt.” - Lauren Greutman
A budget is a fundamental tool to help you reduce debt, save money, and plan for big expenses.
Most people know they should keep a budget. A recent large survey by Tiller Money found “keeping a budget” was the fourth most popular financial resolution for 2018. (And it was the most popular resolution for women between the ages of 18 - 24.)
But according to a Gallup poll, just 32% of Americans currently keep a household budget.
People avoid making a budget for three major reasons:
Lack of certainty about the best way to create a budget.
Budgets often reveal the humbling truth about what we can (and can’t) afford.
Budgets feel constraining and limiting.
In practice, budgets are (eventually) freeing. They give us confidence to make informed decisions about our money. And they keep us from repeating annoying mistakes.
There are lots of ways to make a budget. The only bad budget is one that doesn’t exist. By all means, spend an hour or two reviewing different budgeting strategies.
But don’t get frozen by analysis paralysis. The truth is that, like goals, the best budgeting systems are very simple.
Remember, at this point your goal is very simple: create a habit of showing up to look at your budget once a month.
Sooner or later, as you win the habit of showing up, you'll start to do things with your budget. You might update some of your earlier assumptions. You might decide to categorize some expenses. This might happen in the first month. It might happen on the 11th.
All that matters now is showing up.