Save and Invest

Build better money habits with these 3 simple steps

A woman working on her budget.
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Our days are dominated by our habits, and that could be a good thing for your finances. According to research from Duke University, habits make up around 45% of our daily behaviors. We're doing many of the same things in the same place, every day. If there's an aspect of your financial life you want to change — save more for retirement or cut out superfluous spending — the best way to make a lasting change is to tweak your daily habits.

The sooner you do, the better off you'll be financially. The good news is that it's relatively simple to form new habits: You just need to start small.

Start off making small changes

If you've ever set a lofty New Year's resolution and failed to keep it — as 88% of people do, according to a 2007 survey by British psychologist Richard Wiseman — then you know how hard it can be to try to make a dramatic change overnight. After all, you can't run a marathon if you've never run a single lap around your neighborhood. Starting small can help make your habits stick.

It can also keep you motivated. Research finds that the the "snowball method " of debt repayment, in which you list your debts in order from smallest to largest, and pay off the smallest one in full first before moving on to the second smallest, is more effective than the "avalanche method, " which prioritizes paying off the debt with the highest interest rate first.

While mathematically the avalanche method saves more money over time if done correctly, people are more motivated to pay off all of their debt by the snowball method. They see results more quickly, and that's encouraging.

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"'Pay the smallest debt first' is a straightforward strategy that can be easily communicated and easily applied," writes Remi Trudel, a researcher for the Harvard Business Review. Prioritizing one small goal at time makes things less overwhelming.

The same can be applied to building up emergency fund savings. While thinking of the total amount you want saved — three to six months' worth of expenses — can seem overwhelming, focusing on a smaller sum can is easier to hit and can inspire you to keep on saving. It's why AmericaSaves.org advises people with no savings to aim for $500. It's a stretch for some but still manageable. And once you do, you'll want to keep up your savings momentum.

Starting small with savings or debt repayment is like beginning weight lifting with five-pound-weight repetitions. You're building muscle memory before you move on to something harder.

Scale up incrementally

Once you've gotten in the habit of practicing a simple money habit — say, bringing your lunch to work a few times a week, or setting aside $50 in savings every month — you can start adding on to it. With the aforementioned examples, that could mean meal prepping for an entire week or saving $100 next month.

If you set your expectations too high and you don't accomplish your goal, it can be more deflating than not starting. Study after study has shown that changing everything all at once just isn't sustainable over the long term.

"Many often people make the mistake of trying to achieve too much," writes Wiseman, the British psychologist. "The chances of success are greater when people channel their energy into changing just one aspect of their behavior."

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For example, if your goal is to save for retirement, you don't need to necessarily hit the contribution max right away. Every little bit helps, said Ted Benna, creator of the 401(k), at The Wall Street Journal's Future of Everything Festival in New York earlier this week.

"You've got to make a decision if I'm going to put 1% of my pay into this, and then maybe every time you get a pay increase you bump it up," Benna said. "Everyone can do that."

Make changes as needed

Inevitably, you'll face some set backs. But as James Clear, author of Atomic Habits, writes, the best thing you can do is recognize your mistake, and get back on track as quickly as possible. Few things in life are all-or-nothing situations. For example, if your goal is to invest $100 each month in a Roth IRA and you miss a month, forgive yourself and commit to getting back on track next month.

The best thing to do, Clear writes, is to plan for failure by considering what in your life could impede your progress.

"What are some things that are likely to get in your way? What are some daily emergencies that are likely to pull you off course," he writes. "How can you plan to work around these issues? Or, at least, how you can bounce back quickly from them and get back on track?"

Remember, to build good financial habits, "you just need to be consistent, not perfect," he writes.

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