Skip to main content

Atomic Habits for Personal Finance

Atomic Habits by James Clear is a simple yet incredibly insightful read about habit building. It centres around the fours stages of a habit and the driving forces behind them. You can leverage this knowledge to build good habits - and to break bad ones. Today, let's apply these insights to the world of personal finance.

The Habit Loop - The 4 Stages of a Habit

The habit loop consists of:

Cue ---> Craving---> Response ---> Reward

The cue is the trigger. It can be a location, time, feeling, sound, action, etc. The cue sets off a craving.

The craving is the desire to change your current state. If you're hungry, it's the desire to be feel full; if you're stressed, it's the desire to feel relief. This is the motivation to act.

The response is the action that satisfies your craving - the habit itself. The eating to settle your hunger, the nail biting to settle your stress.

And finally, there's the reward. Your craving satisfied.

The 4 Laws of Behaviour Change 

Behind each stage of the habit loop, there's a law of behaviour change. We can leverage these laws to develop good financial habits.

1. Cue - Make it Obvious

The more visible your cue, the more likely your habit will take place. There are four techniques that can make cues more visible. The habits scorecard, intention statements, habit stacking and environment priming.

A good place to start is with the habits scorecard. To do this, write down your current money habits.

What are your spending habits? 

What are your savings habits? 

How are you investing? 

This exercise clarifies your starting point.

Once you understand what your habits are, you then write down what you want your habits to be. You can achieve this with intention statements. These statements transforms the fluffy goal of "being better with money" to clear actionable items.

I will [Behaviour] at [Time] in [Location].

For example:

I will invest 10% of my salary after every payday in my office. 

I will read about personal finance before going to sleep in my bedroom.

Habit stacking is great technique to ensure you remember to perform your desired habit. It cleverly utilizes a current habit as the cue for the desired habit.

After[current habit ], I will [desired habit].

For example:

After browsing Reddit, I will record my spending for the day.

Finally, it's important to prime your environment for success. The more cues in your environment, the more likely you'll engaged in your habits. The inverse is also true.

If you find yourself not investing. You can prime your environment with reminders. Set an alarm on your phone, circle a deadline on your calendar, make it clear!

If you find yourself overspending, eliminate cues that make you shop.

Delete deals apps from your phone.

Use website blockers for Amazon and Ebay.

Remove yourself from retailer mailing lists. 

If the cue is invisible, your craving will fail to start. Out of sight, out of mind.

2. Craving - Make it Attractive

Saving money and investing isn't the coolest thing. It's way more fun to splurge on sneakers then to contribute to your retirement account.

Temptation bundling can make good financial habits more attractive. This is done by pairing an action you need to do with one you want to do. This wires your brain to start to craving the habit you need as it means you get to perform the habit you want.

After [habit I need], I will [habit I want].

For example:

After I pay my bills, I will get to check Facebook.

After I invest, I will get to watch The Office. 

3. Response - Make it Easy 

The least friction between you and your habits the more likely you'll do them. When it comes to finances, automate as much as possible.

Never be late again by setting up automatic bill payments.

Set up automatic deductions from your paycheck to fund your retirement investments.

Spend less on eating out by prepping your meals in advance.

The inverse is also true, the more friction between you and your habits, the less likely you'll do them.

If you want to spend less, only bring a limited amount of cash when going out.

Remove auto-subscriptions so you only re-enroll to services you really need.

4. Reward - Make it Satisfying 

The fourth and final law is to make your habit satisfying. There's nothing more satisfying in finance than seeing progress.

Saving money is an invisible habit, since you're actually abstaining from action. To make saving money satisfying, you need to make it visible. You can do this by setting up a savings account and naming it after your savings goal. For example "Dream Trip". Every time you stop yourself from splurging on takeout or excess clothing, you add the amount you saved to the account. Seeing that progress will motivate you to save more.

With investing, you can track your progress by seeing how each additional investment will lead to better retirement. The power of compound interest makes this extremely satisfying as each incremental investment leads to an exponentially better retirement. You can create a visualization of this with compound interest calculators.


Atomic habits is overflowing with helpful tools and techniques, well beyond what I wrote about here. I highly recommend it. It can help you with not only your finances, but with many aspects of your life. 


Popular posts from this blog

The Art of Giving Feedback

Constructive feedback is an awkward affair. You don't want hurt feelings, but recognize the importance of honesty. You've tried the classic "hoping things will get better on its own" and unfortunately it hasn't played out. When giving feedback, here are a few things that I try to keep it mind. Start with empathy. Step into their shoes and understand their story. If you don't know, ask. Be genuinely curious. Feedback is a dynamic affair. Shared communication with a shared goal towards progress. Take the emotion out of it. Focus on the situation, not the person. Focusing on the person adds unnecessary weight to an already emotionally-bloated event.  Be specific. Give clear examples. Vague feedback equals dismissed feedback.  Doing above won't de-awkward things fully, but it will dampen it and increase the chance of better outcomes. 

Bias For Clarity

Bias for action. Gets things done. Go-getter. Traits companies big and small look for. And for good reason, you're being hired to do things! However, action is a secondary step that often overshadows the primary step, direction.   Clear direction is the foundation that enables our actions to takeoff. Without it, we're stuck in the mud.  Striving for clarity is an underrated skill. Having the courage to ask ( seemingly ) obvious questions, and to check in, making sure we're all on the same page. "O bvious " questions are a low risk, high reward way to add value. At worst, you'll add confidence to our actions. At best, you discover a misalignment that saves us from a dead-end.  The more people, the more clear we need to be. The bigger the initiative, the bigger the risk of reaching the finish line, only to realize expectations were off.  Success is always uncertain. But we can be certain about what we want and what everyone's job is. Things that can be clea

Negative Feedback, Positive Lessons

In the battle against plastic bags, a five-cent tax was shown to be much more successful at deterring usage than a five-cent credit for bringing your own bags. Carrots satisfy but sticks sting, and they sting hard. So we default to the less painful choice of avoiding loss. Loss aversion impacts the way we process information. A 2019 study  invited participants to learn through a series of multiple choice questions. Each question only had two options to choose from. Whether guessing correctly or not, they would still learn the right answer.  Despite the identical learning opportunity, participants were much more successful at recalling the answers they guessed correctly than those they got wrong.  "You're right!" feels good. We savour the moment, analyzing every detail.  "You're wrong!" stings. We want to quickly forget, dismiss, and move on.  When we succumb to loss aversion, we miss opportunities to learn. Failure is part of the process. We'll experie