The Secrets of Habit Formation: A Three-Part Series Inspired by "Atomic Habits" by James Clear

Part 2: Understanding the basics of habit change and identity formation

Why is it often easier to stick to bad money habits than good ones? Why do we struggle to keep up with good habits like not overspending or saving money?

"Changing our habits is hard for two main reasons. First, sometimes we try to change the wrong thing. Second, we try to change our habits in the wrong way." (Clear, 2018: 28).

Since we're talking about being smart with money, let's look at the ideas below as illustrated by James Clear and see how they relate to finance:

Outcomes: The first layer is about changing your financial outcomes. This means making changes to things like how much money you save, how much debt you have, or how much you want to invest. Most of the goals you set are connected to this level of change,  increasing savings, reducing debt, achieving investment goals. 

Processes: The second layer is about changing your financial processes. This is about adjusting how you do things with your money, like making a budget, keeping track of what you spend, or diversifying how you invest. Most of the financial habits you build are connected to this level.

Identity: The deepest layer is about changing your financial identity. This is about shifting the way you see yourself in relation to money, like how you think about money, how you see yourself managing money, or challenging beliefs about wealth and success. Most of the beliefs (and/or biases) you have about money are connected to this level.

When everyone around you is taking out loans and buying things they can't afford, it's hard to be different. It's hard to pass up nice things when out for dinner with friends or on holiday. It's hard to say out loud that you can't afford a new coat or to buy a friend a birthday present. (Bird, 2022: 130)

Don't just think about what you want to achieve, like saving a specific amount of money. Instead, think about who you want to be, and build your habits around that.

Again taking the example from Atomic Habits, let's imagine two people who have the option to buy things they don't really need. One person says, "No thanks. I'm trying to spend less." Even though they're trying to change their spending habits, they still see themselves as someone who has a hard time not spending too much money. They're hoping to spend less, but they still think of themselves as someone who has trouble controlling their spending.

But the other person says, "No thanks. I want to be wise with my money." This small difference in what they say shows that they're thinking about themselves in a new way. Before, they used to spend too much, but now they see themselves as someone who is careful with money. They're not just changing their actions; they're changing how they think about themselves.

Many people aim to make their finances better without considering how they view themselves. They might say, "I want to have some extra cash for emergencies, so I'll try to save more." They set goals and figure out what they need to do to reach them, but they don't think about how they perceive themselves. They don't realise that their old thoughts about money can block their new plans.

“You have a new goal and a new plan, but you haven’t changed who you are.” (Clear, 2018: 32)

• The goal is not to save money for a specific purchase; the aim is to become financially savvy.
• The goal is not to budget for a vacation; the objective is to become financially disciplined.
• The goal is not to invest in stocks; the goal is to become financially literate.

In every situation, the attention moves away from just reaching a particular money target to adopting a wider identity linked with being smart and responsible with finances.

Many people just accept the labels tied to our money habits without really thinking about it.

• "I'm not good with money."
• "I'll never be able to save."
• "I'm always in debt."
• "I don't understand investing."
• "I'm not a numbers person."
• "I'll never be wealthy."

These statements reflect common beliefs people have about their money skills, usually without questioning if they're true or thinking about how they could get better.

“When you have repeated a story to yourself for years, it is easy to slide into these mental grooves and accept them as a fact. In time, you begin to resist certain actions because “that’s not who I am.” There is internal pressure to maintain your self-image and behave in a way that is consistent with your beliefs. You find whatever way you can to avoid contradicting yourself.” (Clear, 2018: 34)

Your money habits shape your financial identity. You're not born with set beliefs about money; instead, your experiences shape what you believe, including your views on your financial skills.

Your money habits are like a mirror reflecting your financial identity. For example, if you carefully track your spending every day, you show that you're someone who takes money seriously. If you invest your money regularly, you show that you're a careful investor. And if you budget carefully, you show that you're someone who's good at managing money. The more you keep up with a money habit, the more it strengthens the identity linked to that habit. 

Bringing it all together, you can see that habits are the way to change your financial identity. The most effective approach to transforming who you are financially is to change what you do.

• Every time you carefully budget, you show that you're someone who's good with money.
• Every time you invest regularly, you show that you're a smart and savvy investor.
• Every time you focus on saving, you show that you're careful with your money.
• Every time you make smart money choices, you show that you understand finances.

"Money isn't a secret recipe that only rich people know. It's a mindset, an attitude, that anyone can have." (Bird, 2022: 8).

Each money habit not only gives you real results, but it also helps you trust yourself more. When you keep doing these things and see good results, you start to believe more in your money skills. As time goes on and you see more and more evidence of your progress, the story you tell yourself about your money skills starts to change too.

The real question is: "Are you becoming the person you want to be?" The first step isn't about what or how, but about who. You need to know who you want to be. And to figure this out, you need to understand how habits and identity are formed. Below are some examples to illustrate this:.

1. Keeping Track of Spending: Start writing down what you spend money on every day to understand your habits better. Ask yourself questions like, "What do I believe about money?" or "Are my habits helping me reach my money goals?"
2. Tying Habits Together: Try connecting new money habits with things you already do every day. For example, check your budget or savings plan right after your morning routine, like having breakfast. This makes it easier to remember and do regularly.
3. Setting Easy-to-Reach Goals: Decide on simple money goals that you can achieve, like saving a little bit each week or putting money into savings regularly. Having clear goals helps you stay focused and motivated.
4. Using Apps to Help: Use apps on your phone (I'm always happy to recommend YNAB ) or computer to manage your money. These can help you track your spending, make budgets, and even save money automatically. They make it easier to build good money habits.
5. Believing You Can Improve: Think of challenges as chances to learn and grow, not reasons to give up. When things don't go as planned with your money, see it as a chance to get better. Remember, progress takes time, and it's okay to make mistakes along the way.

“Habits are not about having something. They are about becoming someone.” (Clear:2018, 38)

Becoming the best version of yourself requires you to continuously edit your beliefs, and to upgrade and expand your identity (and your mind).

Coming Soon: Part 3 - Understanding How Habits Form: Breaking it Down Step by Step. In this upcoming article , we'll explore the basics of habit-building breaking down the process into easy-to-understand parts. We will see what habits are, how they work, and how to make them better. 

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