“Habits are the compound interest of self-improvement”
- James Clear.
For many, investing can seem out of reach. The common response to why someone doesn’t have an investment account is usually that they don’t have enough money. This is a common misconception about investing. People think that you need to have a large amount of money set aside before you can begin.
The truth is, as long as your high interest rate debt has been paid (things like credit cards) you can begin to invest with as little as $50. When strong saving and investing habits are created early, you are better able to take advantage of the long term benefits of compounding returns. If you are later in life reading this; it is never too late to start creating better saving and investing habits today.
Outcome based or identity based habits
In his book, Atomic Habits, American author James Clear breaks down the best way to form a habit, and how small changes can have profound impacts on our life. He argues that people can focus on habits from two ways; outcome based or identity based:
- Outcome based focuses on what we want to achieve, and
- Identity based habits focus on who we want to become to create habits that last longer than a week or month, he believes we should focus on creating Identity based habits.
The difference between the two is that we don't want to simply save $25 a month, we want to become a saver. Saving is now part of our identity.
The path to creating new habits
For some, creating a habit is easy and for some it is a test of willpower. The good news, is that once the habit is truly formed, it becomes an unconscious act we execute. Think, looking over your shoulder before you back out of the driveway. Despite technological advancements in vehicles and the increased prevalence of back up cameras, most of us still check behind us as it is a habit.
How do we create new habits? Habit stacking is the process of stacking a new habit onto an existing habit that we have already formed. The method was created by behavioral scientist, B.J. Fogg as part of his tiny habit program. According to him the habit stacking formula is, “After [current habit], I will [new habit]. It can be as simple as once you make your morning coffee (already formed habit), you make a healthy breakfast (new habit).”
Automating savings and pay yourself first
Automation can take the guesswork out of investing. It is much easier to “pay” yourself first and have automated transfers to investment and savings accounts than it is to pay yourself last. The latter requires an enormous amount of discipline and self control. Spending money now sounds infinitely more exciting than putting money away to use later in life.
When you automate savings, it is one less thing for you to think about. Every time you get paid, a predetermined amount will go towards your investing/savings. The earlier on you create the habit to save and invest the better. If you are in your 20s, you have the benefits of a long runaway ahead of you. Meaning you are able to leave your money invested for much longer than someone who is in their 40s or 50s.
If you saved $100 a month starting at age 20, assuming an annual return of 5%, your portfolio would grow to $144,960 at the age of 60. If you started saving $100 a month at the age of 40, assuming an annual return of 5% your portfolio would only grow to $39,679 at age 60. That is the benefit of starting early.
Starting later doesn’t mean all hope is lost. It just means you have to be more diligent and have an increased level of savings to get to the same point as if you started earlier.
The hardest part of any new habit is getting started. Eating broccoli isn’t exciting but the benefits of a healthy diet can have drastic impacts on your overall health over the long term. Paying yourself first is equally as un-exciting as eating broccoli. You might not feel financially secure after the first day, but continued saving over time will lead to lasting impacts on your financial well-being over the long term.
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