One New Habit Could Change Your Financial Future

A few weeks into a New Year, I’ve taken stock of what I accomplished last year and how I hope to grow in 2017. One important decision I made is to give up on New Year's Resolutions. Instead I'll focus on reaching my goals by building good habits.

Reading The Power of Habit by Charles Duhigg inspired me to make the change. (So did failing to keep all of my past New Years’ Resolutions. Oops.)  In the book Duhigg writes a compelling manifesto on the influence of habits in our daily lives. He breaks habits down into their component parts, warns how bad habits can derail our lives, unveils the unseen habits that help us function daily, and teaches how good habits can help us lead a better life.

One fascinating chapter details how occasionally small habits can have a ripple effect, transforming an entire dimension of our lives. He calls these uniquely powerful habits “keystone” habits. In the architecture of an arch a keystone holds the structure together, keeping every other stone in place. In nature, a keystone species maintains the delicate balance of an ecosystem. When it is threatened an entire food chain collapses. Likewise in life, keystone habits are practices that can have a profound impact on our behavior and well-being.

I like to think of a keystone habit as a cheat code for life, the most efficient way to influence the ecosystem of our behaviors. I quickly became obsessed with the concept and started considering potential keystone habits. What small tweaks in my life could enrich my relationships, fitness, or transform my finances?  I decided to try to discover one habit that could promote financial wellness. The first hint I found in the book came from the story of a 340 pound man.

A Keystone Habit for Weight Loss

Duhigg interviewed a man who lost 70 pounds after reading his book. What habit had he developed to achieve his success? The change was simple. After stepping on the scale and weighing in at 340 pounds, he continued stepping on the scale every day.

“I would weigh myself every morning. And because I weighed so much, minor changes -like a piece of fruit instead of a Danish- had a small but pretty quick impact. And when I saw those first few pounds disappear, there was this immediate sense of excitement like, wow, I’m really doing something. It made it easier to believe this would work, that I could actually succeed at losing weight.”

The slight change in routine created a new habit for him, and a new level of thoughtfulness throughout the day. At dinner each night he knew that he would be weighing in the next morning. The desire to drop pounds began to outweigh his desire for comfort food. His routine helped him develop a set of other habits, like moderate exercise, that he noticed would help each day as he tracked his progress. Since Power of Habit was published, a study from Cornell University has confirmed the relationship between the daily weigh-in habit and long term weight loss.

A Keystone Habit for Your Money

So how does this tie into finances? What one habit makes a tremendous difference, holding together a host of other good habits and making financial success more probable? What one habit once removed puts your finances in disarray? It’s similar to stepping on the scale every day. The keystone habit is: diligently tracking your finances.

You have to follow the money. If you want to change your financial future, start here. If you want to develop new insights about how to save more, spend less, or pay down debt, try this. For inspiration to boost your income or invest for the future, start by tracking your finances.

Here’s what I mean by tracking your finances. Every day commit to writing down and categorizing each financial transaction you make. I say tracking finances instead of tracking expenses because expenses are only one half of your financial situation. Pencil in all of your income, and memorialize every outgo. You can track your finances via a simple spreadsheet, a banking app offered by your financial institution, or go old-fashioned with a pen and paper. To ensure the habit sticks, commit to the practice for at least 2 months (it takes an average of 66 days to build a new habit).

Note: Paying off your credit card each month after swiping it thoughtlessly all month is not tracking your finances. Glancing at your account balances to ensure you’re not in overdraft at the end of the month is not tracking your finances. Commit to taking a deep-dive into your financial behavior, you’ll thank yourself later!

After “following the money” each month, do a side by side comparison of your earnings and your expenses. How much exactly did you earn? Where did those dollars go? Did you spend more than you earned like 18% of Americans? If not, what percentage of your income went to savings? 

Organize the numbers by putting transactions into categories. How much of your take-home pay went toward food? What about transportation? What chunk of earnings went to housing in mortgage or rent? Seeing the proportion of income going to each different category begins to build awareness of your financial state.

Looking at the results of tracking your expenses is like stepping onto a financial fitness scale. You’ll be faced with the reality of your situation. Don’t look away. This is your life! As you immerse yourself in the numbers you’ll learn more about your financial situation and spending habits than you ever knew before. The lavish spender will see how much impulse spending is gouging him. The frugal spender will recognize how little of her money she allows herself to enjoy.

The best part about this habit? Anyone can do it. The point of the process is not to immediately change behavior, but to simply build awareness. Awareness is the first step toward change, and tracking your finances can create massive changes.

The Domino Effect

Remember the guy on the scale? Greater awareness of his weight led to small changes in behavior. Over time those small changes created a domino effect of healthier choices.

Consider the other dimensions of financial well-being this keystone habit of tracking your finances influences. Tracking your finances is not budgeting, but once you see where your money is going each month you’ll deftly budget future expenses. That budget may include increases to saving or investing goals, easily funded after canceling those monthly subscriptions you weren’t using.

After two months of spending more than you earned you may realize your income cannot support your lifestyle, motivating you to dial back your spending a bit. Or perhaps you'll make a change on the income side by finding a side job, a new job, or finally asking your boss for a raise. 

Tracking your finances won’t make you debt free. But it will help you see just how much of your hard earned money goes to repaying debts, perhaps prompting a faster payoff schedule. Stepping onto the financial scale won’t boost your net worth overnight, but it may boost your assets over time, as you commit to new goals of saving and investing.

Tracking finances is the first step to taking control of your money, it’s a keystone habit that could change the rest of your financial decisions for the better. I challenge you to try it for 2 months this year, and let us know your results in the comments below!