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Habits and Your Financial Health
There is a saying “you are what you eat”. There is another saying which is equally important – “You are the product of your habits”. Using an analogy of an ocean liner – how would you steer it to change course in a meaningful way? Very slowly but steadily. If you could imagine an ocean liner, you would turn the heading slightly – a fraction of a degree in the direction you want to go. Some of the people watching the ship don’t even know anything has happened. Over time, the effect of small changes in direction compounds and becomes larger and larger. By the time you reach your destination, you may be hundreds or even thousands of miles away from the original navigation. If you tried to steer that ocean liner at once, would you succeed? You will probably overdo it and cause an accident, or go so far that you lose time to correct direction again.
What does this have to do with money and habits? everything If you have a goal to make or save a lot of money and get a ton of great ideas, and then try to implement them all at once, what could happen? Failure! None of the many changes you try to make will stick and there will be no effect. How about going semi-narrative and choosing one change that you can easily make, and that you make this change for a long time? You will likely be more successful. Here’s the secret to changing money habits and letting time do its magic. If you make a change that is barely perceptible (ie painless), then this method will hardly be a strain.
What are some examples of this? Have you heard of the late factor? The late factor is making one incremental change per day – not saving money by buying that cup of coffee. Depending on the frequency of how many cups of coffee a person buys over the years of their lifetime, this will add up to meaningful savings. Another version is that instead of buying a latte, you buy regular coffee and add your milk or cream to it. This will save you $2 per day as an example. After 365 days, you’ll have saved over $700 per year from this one incremental habit change. The ocean liner analogy shows the effect of compounding change to make it even bigger. What would you do with $700? Let’s say you invest it for 10 years. On top of contributing $700 x 10 years, you’re also making a return on this investment. As a wild guess, let’s say you earn $3500 over 10 years – averaging about 5% per year. Now its effect is added. You can then take this money and deposit it into an RRSP and get a tax refund that extends the effect even longer.
The late factor has been hammered in many blogs and financial circles. The point of the latte factor is an example of a small habit that, if implemented consistently, can lead to big changes over the long term. There are many other habits that can achieve this result. How about saving $1 a day buying bananas from your local grocery store? How about negotiating a slightly better rate on your cell phone plan? How about purchasing a basic gym membership instead of a deluxe one that’s less involved but will suit your needs exactly? How about wasting a little less food each day and buying a little less? Maybe computers, cell phones or cars that you keep a year longer than you used to drive? Ask yourself what the trade-offs might be for doing these things – but if there’s really nothing to lose then you’ve found a habit that will create more money.
There are techniques that say you need to do the routine for 21 days to stick to it. It’s basically saying that by doing it long enough, you’re making the habit automatic. It will get to the point that when you don’t do it, you’ll miss it! Why not get creative and see what habits you can change that add up to incremental effects over time?
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