As the holiday season comes to an end, many of us will be looking ahead and making resolutions about how we’ll do things differently this year.
Perhaps you’ve decided to make some financial goals to ensure the new year is more stable and prosperous than the year before.
Unfortunately, many New Year’s resolutions created at the last minute are promptly forgotten or thrown out within a month. It’s difficult to uphold your resolutions if you don’t take into account the difficulty of changing habits.
Thankfully, behavioral economics and the psychology of habit offer insights into how to make long-term financial goals stick.
How to make long-term financial goals
If you want to make 2018 the year you reach your long-term financial goals, consider the following tips.
1. Recognize what’s valuable to you
Sometimes when we set New Year’s resolutions, we forget to consider the things we might be giving up to meet our goals.
For instance, maybe you resolve to meet a savings goal by giving up unnecessary spending, from your morning latte to weekend getaways.
If you don’t truly value barista-made coffee or travel after the workweek, then giving up spending on those things will be easy to do. But it’s likely that you spend money on them for a reason. Trying to quit them cold turkey will be hard.
Before you decide to cut back on your spending, look back on the purchases that were the most meaningful, enjoyable, or valuable to you over the last year. That will help you recognize where you want to spend your money over the coming year.
Then, cut your spending on things that don’t matter as much to you. That way, you’re unlikely to waste money on things that are less important to you.
2. Automate your goals
After you’ve identified which saving goals you value, automate your finances to achieve them.
Say that you love going to an annual music festival like Coachella, but you struggle to pay for it. Set up an automatic weekly transfer from your checking account into savings. That way, you have enough time to save up for the expense. Plus, your budget won’t be completely wrecked by it.
Creating an automated system for important purchases will leave you more mental bandwidth to focus on your long-term financial goals.
For example, since you know that Coachella will be paid for, you can focus on how to pay off your student loans, save up for a down payment on a home, or increase your retirement savings.
3. Make your resolution an identity-based habit
Setting a big goal to accomplish in the new year can help you push back on your self-imposed limits.
However, you also need to establish new habits to achieve your long-term financial goals. And forming a new habit can be difficult.
For example, imagine that you want to pay off all your debt in 2018. And, on top of that, you resolve to quit using your credit card.
In January and February, you put your credit card away and hustle to send extra money to your creditors. But then a snowstorm leaves you housebound and bored, and you end up going on an online shopping binge.
Once you’ve done that, it can be hard putting the credit card away again, not to mention hustle to pay off your debt.
Author James Clear recommends that you create identity-based habits to reach your goals.
To do this, you first need to decide what kind of person you want to be. Take actions that prove to yourself that you can be that sort of person.
For instance, if you want to get out of debt this year, you could resolve to be the sort of person who sends an extra payment to your creditors each week, no matter how small.
Each time you send extra cash to your student loan lender or credit card company, you’re reinforcing your view of yourself as the sort of person who works to pay off debt each week.
Those weekly actions become a habit, and you slowly become the person you vowed to be. Over time, you end up reaching your long-term goals.
4. Forgive your slip-ups
Resolutions often fail because we tend to think of them as all or nothing.
For example, if you cheat on your resolution to cut out credit card use, you might feel like you’ve failed altogether. And once you’ve slipped up, you could feel like you might as well keep on going and charge more to your credit card since you’ve already faltered.
This concept also plays into dieting. Psychologists refer to it as counterregulatory eating, but it’s more commonly referred to as the “what-the-hell effect.” After you’ve broken your diet once, it’s easy to think, What the hell, I might as well abandon it altogether!
The only way to deal with this effect is to recognize that you’ll falter sometimes. The what-the-hell effect plays into the mistaken belief that we need to be perfect to make progress on our long-term financial goals.
But consistency is far more important than perfect behavior. Recognizing that slip-ups do happen allows you to continue to work toward your goals, rather than give up altogether.
When you make a mistake, acknowledge that you messed up, forgive yourself, and move on. All the slip-up indicates is that you’re a human being.
Achieve your 2018 financial resolutions
Real change is possible for all of us. But it takes more than a resolution to change things.
To meet your long-term financial goals for 2018, preserve the spending that’s most important to you. Then, create an automated savings system around it.
Figure out what kind of person you want to be. Be kind to yourself when you make a mistake. Finally, perform a year-end review to see what worked and what didn’t.
These are the best ways to ensure that the changes you want to make in 2018 will stick around in 2019.
Andrew Pentis contributed to this article.
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