CFO of Life #103: Habits - the most important thing you need to harness on your journey to becoming the CFO of your Life

We can’t control everything, but we can control what we do, how frequently we do it and how much we do of it.

That’s why it is important to focus on building healthy habits and healthy behaviours.

?And this is especially true when it comes to money, because as “Easy comes and easy goes,” money will spill through your fingers. But you are here and you are learning how to get better with your money, so you build a lot better habits, plus a lot more scalable and sensible strategies that help you grow and get to the next point of your journey.

?Last week we looked at the definition of habits, how to build them, what strategies to use and how. In this newsletter, I will break down the topic of habit building with the aim of how to use reinforcement to curb your bad habits or to reward your good ones. This will be covered in the following 5 sections:

1. What is a habit and why are they important?

2. What is the drawback of having bad money habits?

3. Operant Conditioning ie. the scientific way to reinforce or punish any behaviour

4. Positive and negative reinforcement and how they influence your habits

5. Why do you need to reinforce your habits?

?If this is your first time reading this blog, my name is Simeon Ivanov (Si-Me-On). I write this weekly blog about personal finance called CFO of Life to bring you on the journey to becoming the CFO of your Life! I hope you like it and stick around for the long term!

Now, let’s get into the thick of it!

Habits are automatic behaviours that are triggered in response to context, environment or behaviour. Interestingly, we subconsciously perform most of our habits and if you ask people why they do this or that they frequently say “Because I am used to doing it”.?

?This is why it is important to spend time understanding how habits are built, how habits are changed and what you can do to influence them. Ideally, you can use that to build healthy habits around your personal finances.

?Well, the drawbacks of having bad money habits can be devastating! From drowning in debt, to wasting money, struggling in your retirement and needing to eat pot noodles all month because you went gaga on a new bag.

?All those are bad money scenarios that can play with your finances and prevent you from being able to reach your goals. Not only it can limit you, but it can also limit the progress you’ve made for your family. Another component that can dampen your progress is debt and there is a point where you accumulate so much of it, it becomes almost impossible to escape it.

?At the same time, imagine how much further you can go, what you can afford and all the experiences you can have if you didn’t have those habits. Well, let’s work on changing them and enabling a better life for you and your family!

It is the development of an association between actions and the direct consequences or outcome of the action. It is all about linking how what you do influences what happens and how your actions lead to an outcome. In a nutshell, that’s what Operant Conditioning is.

?This showcases what behaviour needs to be stimulated/ rewarded to bring the desired outcome and what action needs to be punished to dampen the negative impacts on your life, goals, happiness and future.

?In real life, this is best used to understand how you can acquire or remove any behaviour that doesn't align with your plans, as those are the fundamental levers you can push and pull to increase your speed of success.?

?I know that this is not the sexiest or most glamorous thing to do, but it is the right thing to take you further. As it would help you learn how to stick to your good habits and how to curb the bad ones. All that is done through the reinforcement of good habits and the punishment of bad ones.

It is simple, we want to reinforce the positive habits and punish the bad behaviours as it is proven that using a reward will reinforce any good behaviour and stimulate you to do the right thing.

?Just imagine this, you are at work and you are doing a great job on a piece of work you developed yourself, so as a thank you, you receive a huge bonus from your employer, which itself should make you super happy. And next time you have the opportunity, you would do your best to find something new to develop, so you can get that bonus.?

?Here the bonus is the reinforcement mechanism that pushes you towards doing the right thing. Which itself is also the motivator to do the right thing. This is also called direct reinforcement as the bonus directly reinforces your behaviour.

?Where if you receive a promotion you would be happy, but your salary increase would make you push towards working harder. So the salary increase is the consequence of your promotion, but it is what reinforces your behaviour. This is the second order of reinforcement that stimulates you to perform.

?As you might guess, you can use this to negatively reinforce a behaviour you don't want to like. An example is that on days following any event of overeating, I do 200 push-ups. Don't get me wrong, I enjoy plenty of food in moderation, but quite a few times just the thought of doing 200 push-ups prevents me from ordering another dessert I don’t need.

?Those are some simple examples, but you can see how you can use them in your day-to-day life. Now, it is time to see how you can implement this into your personal finances.

?Now that you know how to use positive and negative reinforcement, it is time to put them to good use towards improving your personal finances.

?To do so, you need to make the following two decisions: 1. What habit do you want to improve?

2. Do you want to reward or punish a specific behaviour and how?

?For example, every time I do my accounting at the end of the month, I buy myself a piece of nice cake and enjoy it by myself.?

?This shows you the habit that I am trying to reinforce: doing my accounting.

?And the reward is the piece of cake that I buy to make myself happy.

?Now, some might say that this is too simplistic, too easy and too basic. There are no 100 magic steps, 12 loops, 7 reminders, 4 apps or 2 meditation cycles before and after I do my habit. But that is the actual idea, to make everything simple and easy to follow with a great reward at the end. It makes it easy to stick to the habit, easy to reward and easy to punish the bad behaviour.

?For example, if I don’t reach my savings goal (as % of my income) I have to donate ￡100 to a party/ candidate that I don’t like. And to be honest, I don’t want to give that person any donations, which itself is a huge motivator for me to ensure that I hit my savings goals.

?The reinforcer or the thing which makes me more likely to stick to my habit is big and would deter me from even thinking about not doing the right thing for myself and sticking to my goals. I hope this gives you a great framework to help you create new healthy habits or to remove your old purposeless habits that distract you from your goals.

?And to conclude this madness, it is hard to stick to your habits, as it takes a lot of time to develop them, to learn how to execute them and how not to suck at them. But it takes one small slip up and the habit is gone forever! That’s why it is so important to create super-healthy reinforcement cycles. No matter how trivial the habit is, good reinforcement will mean that you get great, consistent and expected results, which in the long term will pay dividends, regardless of the habit.

Ultimately the work needs to be done, so do the thing! - Chris Williamson

Post #103 in the series CFO of Life #si #personalfinance #CFOofLife