By William Velekei, CPA, CFP
The new year is here, and at this time we often reflect on the past year and focus on resolutions for the year to come. We are optimistic, viewing this time of year as a fresh starting point to accomplish long-considered goals or break old habits.
But it can be tough to commit to a goal or resolution for a full year; tougher yet to go longer than a year. When it comes to financial resolutions, there are many articles that provide a generic list of action items to take in order to strengthen your personal balance sheet and save more. But our relationship with money and savings goes deeper than a simple checklist; it is a complicated relationship that is deeply affected by our society, culture, and psychology.
To be a successful saver, we need to take steps beyond simply spending less or saving a specified percent of your paycheck. It takes a transformation in the way we think. If we change the way we think, we create beneficial habits so we do not have to continuously analyze and plan. Doing this will create behaviors that last not just one year but years to come. This change is not easy, but it’s not impossible. In his book, The Power of Habit: Why We Do What We Do in Life and Business, Charles Duhigg states, “New habits are created by putting together a cue, a routine, and a reward.” This can be applied to any situation, and it is especially applicable to personal financial success.
The Cue and the Reward
The first step is to identify the cue and the reward. How should we think about cues and rewards when it comes to the habits of spending and saving money? Take, for example, the cue of receiving a paycheck: whether you see your account balance increase online or cash your check at the bank, a paycheck is an instant cue for many of us to spend money, not save.
The reward is the most crucial part of a habit to identify, especially when striving to save money. Perhaps you are saving for a home purchase, college tuition, or retirement. Duhigg suggests that the practice of identification is much more effective when it is written down. By writing down the desired goal, you are more likely to hold yourself accountable and not give in to short-term temptations.
According to saving statistics, Americans have a difficult time thinking about their financial future. We lean toward instant gratification, which has become routine for too many. Changing a routine is not as difficult as it seems once you identify the cues that trigger old routines, but establish a new set of rewards.
For example, alter the instant gratification reward from purchasing to saving a certain amount for a down payment on a home. The cue would still be earning money, but the short-term reward you are looking for comes from watching the building and accumulating of funds to buy a home. Each time the new routine is completed and the reward of watching the total increase is gratified, it becomes easier to maintain. Eventually it becomes more rewarding to save for the future than it would be to spend in the present.
Make Habits a Lifestyle
Long-term budgeting and saving isn’t a goal; it’s a mindset and a lifestyle. Of course, we all know we cannot change our mindset or lifestyle in a meaningful way overnight. It takes building on repeatable routines that turn into long-term habits for success.
The good news is that, for saving money, we can build good habits with tools that require virtually no effort. Whether it is automatic paycheck deferrals to retirement savings or direct deposit of a portion of a paycheck to a savings account, saving is easiest when it is out of sight and mind.
The new year affords us an opportunity to benchmark new beginnings and routines. Remember, the toughest part to making any change is taking the first step.
For more information on specific saving and budgeting questions, PICPA’s Ask a CPA has additional great resources to help you meet your 2019 financial goals.
Happy New Year!
William Velekei, CPA, CFP, is a wealth adviser for Corbenic Partners LLC, a Registered Investment Advisor that works with high net worth individuals and families, based in Bethlehem, Pa.