The Atomic Habits of Financial Success

the latte factor is depending on who you ask either one of the most eye-opening insights in the world of personal finance or a helpful albeit somewhat overblown tactic for reaching Financial Independence for those who don't know the latte factor popularized by author David Bach is the idea that small regular savings can lead to the accumulation of immense fortunes over time it's called the latte factor because that just so happened to be the example that Bach used of a relatively inexpensive item that someone may find themselves purchasing nearly every day a purchase that if passed on in favor of adding to your Investments over an extended period of time could lead to you growing quite a sizable chunk of wealth and he's not wrong if we figure that a latte or whatever fairly inexpensive but regular purchase you might make costs you about five dollars a day or roughly 150 a month then opting to pass on that purchase and using that money to add to your Investments could over time lead to you building a surprising amount of wealth if we assumed that you put that money into a simple S P 500 Index Fund then and over the course of the last 40 years which in this case would be from 1982 through the end of 2021 as that's the most recent completed year available to me at the time of this writing that five dollar a day investment would have grown to be worth over 1. 2 million even with the downturn we've experienced in 2022 that figure would still clock in at nearly 1 million which is pretty incredible for a mere five dollar a day investment born out of just a single habit change the point is seemingly small decisions when done consistently can build up to creating life-changing results therefore it's important that every once in a while we take a moment to reflect on our decisions and habits that may be leading us down a path we don't want to reach the end of so that we can get down to the business of making the changes we need in order to reach a destination we'll actually be happy with and that's what we're going to be doing today let's discuss the four stages of habit formation and habit destruction that enable us to build those atomically sized habits and make those small decisions that enable us to get the most out of our finances and our lives but before we get going be sure to like this video if you haven't already as it really does help out the channel a lot and subscribe with notifications on for more money related videos like this one every single week and if you want to further support this channel you can check out some of the links I've left in the description below which includes a 30-day free trial of audible and two free audiobooks of your choice as well as a list of some books on money I'd recommend checking out with your free trial the four stages of habit formation as discussed by James Clear author of the best-selling book Atomic habits are the Q the craving the response and the reward let's talk about each of these stages individually and some tricks that can be used in each stage to make our habits stick or if need be disappear the first stage of habit formation is the queue is simply the thing that triggers your brain to do something for example something as simple as the smell of dinner on the table could serve as the cue for you to wash your hands before you eat to make the most out of cues we want to ensure that they are both obvious and recognizable there are many ways we can do this but perhaps the easiest to implement is to tie your desired Behavior to a specific time and place beforehand through the use of a technique that clear calls the implementation intention statement basically what it is you making a plan beforehand about when and where you're going to perform an action the goal is to give yourself some clarity about what you want to achieve and what it's going to take to achieve it for example instead of telling yourself I'm going to work out at least three times a week which is a fairly vague statement you will instead tell yourself that during this week I will exercise for at least 30 minutes after leaving work on Monday Wednesday and Friday starting at 5 30 in the evening at my local gym that's a much clearer plan than just saying you're going to work out a few times during the week it ties your desired Behavior to a specific time location situation and action in this case when you are leaving work on Monday Wednesday and Friday at around 5 30. you could even set up an alarm on your phone to serve as an additional cue and you can take this approach a step further by linking desirable habits to each other clear refers to this as habit stacking in the book for example if in addition to exercising three times a week you wanted to learn to code you would simply add that to your implementation intention statement the statement would now look something along the lines of during this week I will exercise for at least 30 minutes after leaving work on Monday Wednesday and Friday starting at 5 30 in the evening at my local gym after I finish my workout I will return home and complete at least one module in my coding class on the flip side if there's a habit that you want to break because it isn't helping you then you essentially need to do the opposite of what we just discussed instead of making the queue obvious and recognizable for what it is you will want to make it as subtle and invisible as possible for instance if you're not eating as well as you might like you could try something like stashing less healthy foods in more obscure and difficult to get to locations such as the back of the pantry or buried behind other Foods in the fridge or you could even go a step further and remove the unhealthy foods from your house entirely this certainly doesn't stop you from going out and buying more of those unhealthy Foods or just eating out more but at the very least it does ADD extra step to the

process of making a decision that you don't actually want to make and that extra step gives you one last chance to change course the second stage of habit formation is the craving stage I don't think I need to go into too much detail here we all know what Cravings are they're essentially the motivation behind our actions whether those actions involve getting something removing something or just changing something without the craving and the anticipation of the reward that's satisfying the craving will bring we have little reason to do much of anything to get the most out of this stage of habit formation we need to ensure that the reward we get for satisfying our Cravings is as attractive as possible why well because scientists have found that our brains release dopamine often referred to as the feel-good hormone when we anticipate getting a reward in the near future not just when we actually get the reward take a look at this chart for instance it illustrates when dopamine spikes in the process of habit formation the first graph showcases a hypothetical person's experience before a habit is first learned and it indicates that dopamine is released when the reward is received the second time around though dopamine is released pretty much right after the queue is recognized right at the beginning of that craving stage the brain is expecting a reward once the craving is satisfied the third graph shows what happens when a reward that is expected during the craving stage is not actually received during the reward stage in this case dopamine is still released during that craving stage because of the anticipation that the reward is coming but when the reward phase arrives and you don't actually get what you thought you would dopamine levels drop because you're disappointed by the outcome the fourth and final graph showcases what happens when a reward does come but a little bit later than expected again during the craving stage the anticipation of a reward is still there so the dopamine levels Spike but they briefly dip at the beginning of the reward phase as the person is initially disappointed thinking that they did not actually receive the reward that they anticipated but then surprise the reward came in a little later than anticipated and dopamine rise again the point is these studies found that after a habit is initially learned in most cases the bulk of the dopamine Spike comes in the anticipation of a reward as opposed to the actual receiving of a reward therefore if we want to get ourselves to consistently do something we have to make that reward as attractive as possible so that the anticipation of receiving it is as strong as possible you can take this a step further by surrounding yourself with people who have already displayed the habits you want to form I mean there is a lot of Truth the idea that you are the average at least five or so people that you spend the most time with or by tying The Habit that you're trying to form to something that you already want to do clear refers to this as Temptation leveling it essentially functions much like the Habit stacking that we discussed in the previous section what you essentially do is link The Habit that you're trying to form with a habit that you already have and enjoy and wish to keep for instance if you're trying to become more grateful in your day-to-day life you could set up your morning like this after I get my morning coffee a habit that you already have I will say one thing that I'm grateful for that happened yesterday this is the Habit that you're trying to form after I say one thing I'm grateful for I will check in on last night's games or whatever it is that you may want to do that serves as your reward for forming the new habit and again if we have a habit that we want to break we need to do the opposite instead of having an attractive reward that we'll be anticipating with every fiber of our being we want to make the reward as unattractive as possible so as to head off those feelings of excitement and anticipation before they start and we definitely want to ensure that it isn't tied to anything we already really like doing how exactly that'll look for you will of course differ from person to person but that's the general idea the third stage of habit formation is the response or the actual habit that you're trying to form now there are a lot of things we can do to get the most out of this stage of habit formation but almost all of them boil down to one idea make things easy it may sound like a bit of a cop-out but it makes sense when you think about it your ability to form a habit is dependent on a few things first how motivated you are to form the Habit because forming a habit is difficult and takes a lot of effort and energy at first and we humans have evolved to conserve energy when possible for obvious reasons the law of least effort is a thing after all second your abilities to perform the actions that a habit requires I mean if you want to dunk a basketball on a regulation hoop every day of the year but you can't jump high enough to reach the net let alone the rim you're going to have some difficulties and third the friction provided by your situation and environment if you're surrounded by people that are mocking you for the Habit you're trying to form or you're extremely overworked and just don't have much time and energy to focus on creating a new habit or you just haven't gotten that much practice yet then it's going to be a lot more difficult than it would be otherwise so yes especially when you're starting a new habit making things as easy as possible on yourself is a crucial key to success don't be afraid to remove obstacles where you can and reward yourself along the way if you're trying to get into exercise it may sound ridiculous but don't be afraid

to start really small I've known people who have quite literally started off with the goal of doing one push-up a day they did increase that amount fairly quickly over time of course but they wanted to make sure that in the beginning of forming the Habit to exercise it was as easy as possible to get to a point where they could feel like they succeeded if they felt that they could do more than their goal for the day awesome but the point was if they did the push-up they won the day you could translate the approach to finance pretty easily by for example finding a way to save one dollar a day and then gradually raising that amount over time until you reach a savings rate that you're comfortable with now and in the future is it gonna feel a little silly and unimpactful at first yeah probably I mean we're saving a dollar here but that's not really the point is forming the habit for the long term and over the long term a gradually Rising savings rate can be highly impactful and if you want to break a bad habit you guessed it do the exact opposite adopt vehicles to your environment start with larger goals that seem insurmountable and do whatever else you can think of to make things difficult the fourth and final stage of habit formation is the reward stage or the outcome that you were hoping to achieve by practicing a habit to make the most out of the reward stage you want to ensure that it is instantly gratifying instant gratification is oftentimes rightly derided especially in the personal finance Community because it can lead us down a very dark path however it is not inherently a bad thing we can go down a dark path because we are getting instant gratification from things that may feel good in the short term but are bad in the long term but if that last part wasn't the case for instance if we were forming a habit that'll help us over the long term such as saving money for retirement then the instant gratification as a reward for practicing that good habit would be perfectly fine desirable even as it would signal to ourselves in the moment that our efforts are worthwhile and thus it'll help us to ensure that we'll stick with those habits for the long term as long as we're smart about the instant gratification style rewards we give ourselves for forming good habits they will allow us to utilize our natural inclination to prioritize the now over the distant future to our advantage while still allowing our long-term rewards such as growing 401K balances to accumulate in the background some examples of this would be taking more free time for yourself to pursue hobbies that you may otherwise not have had the time to partake in as a reward for saving money as long as these hobbies are not incredibly expensive thus negating the work that you're doing to save money they won't be too counterproductive to your goal of saving money but they may help to reinforce the habit-forming cycle so that's the process of forming and Breaking Habits as you can imagine learning about and mastering these techniques can help maximize your financial progress on the budgeting side of things we already discussed how something as simple as skipping out on a small but regular purchase such as a morning guatee can lead to building a pretty respectable amount of wealth over the years assuming that you move the money that you saved into your Investments and it could require nothing more complex than choosing a different route to work in the morning sure it may cost you a little more in gas if the alternative route is longer which will cut into that savings to a degree but in most cases it'll still be a net positive at least in the financial Sense on the debt management side of things the idea that in order to form a habit you want to make sure that its reward is as attractive and instantly gratifying as possible is basically the philosophy that the debt snowball was built on the whole idea is to give yourself some quick wins by knocking out the debt with the lowest balances first heck the debt tsunami could also fit in here because it helps you to pay off the debts that are causing you the most stress first and that feeling of relief of getting out from under those stressful loans is a very great reward in and of itself in terms of investing there are some people who deliberately start out their investing Journey conservatively by putting the majority of their money into safe bonds and or a blue chip dividend paying stocks for some this can prove highly effective because what they're essentially doing is placing their money into assets that are likely to be less volatile in the short term at least compared to some of the Alternatives and crucially Investments that pay you a regular income just for owning them sure it may not be that much income when you're first starting out but over the first few years these investors will see that cash flow gradually grow as they continue to invest which serve as an excellent reward not to mention a regular cue when the Dividends are paid to continue the habit of investing regularly and those are just a few potential examples there are many more out there besides with that being said what are some examples of financial habits that you've successfully formed in the past what are some that you'd want to break in the future and crucially how do you plan to make the most out of the queue craving response and reward stages of habit formation and destruction let me know in the comments section below but that'll do it for me today once again if you enjoyed this video be sure to smash that like button if you haven't already subscribe and hit that Bell next to my names you'll be notified of all my future uploads if you have a friend that would be interested in this kind of content be sure to share

it with them let's really get this information out there and start our own Financial Revolution