Recently I read a great book from Charles Duhigg titled The Power of Habit. This is where I first learned of keystone habits. Keystone habits can control how we eat, play, live, communicate and spend, and over time they can have the power to change everything. Some of the most influential people in business and sports have utilized this way of thinking/teaching, Paul O’Neill with Alcoa, Tony Dungy with the Bucs and Colts and Howard Schultz with Starbucks.
Keystone habits can lead us to build very strong (and hopefully positive) habits into our lives. It made me think of how we can incorporate some keystone habits into your financial life. I have often told clients to invest $XXX per month into their 401k or Roth, and I can almost guarantee you will adjust quickly and forget you’re already saving $XXX per month. Once you build the keystone habit of saving into your life, it is a beautiful thing! I tried to reference this same idea in a past blog “Investing is not complicated, just save!”
So what are some keystone habits we can form today?
Keystone Habit 1: Build and Keep Your Emergency Fund Funded
There is a reason this is #1, your emergency fund is the key to keystone habits 2, 3 and 4! Your emergency fund will NOT be fully funded overnight, but you have to treat it with respect. Set up an automatic draft from your checking account to your savings account every time you are paid. The amount will vary for all of you. Here are a few tips on the amount that should be in your emergency fund.
Now in life sh*t happens, so that is what this account is meant for. Some call it a rainy day fund; at WealthKeel we sometimes call it the “course correction” fund. Whatever the name, it serves the same purpose, emergencies.
Don’t fall in love with this account, meaning that when you need the money for an emergency, use this account! Don’t put the expense on your credit card and say, “Well Chad told us that we needed to ALWAYS have $20,000 in our emergency fund.” No! That’s not what I meant or how it works. Use your emergency fund and replenish the account with your automatic contributions again!
Keystone Habit 2: Keep Bad Debt a $0.00 Every Month
If you are doing a good job with #1, we can start to form habit #2. When I say bad debt I am usually referencing one thing, credit card debt. Depending on some questionable car debt or personal loans I could expand the topic, but for now let’s stick with credit card debt. You should build the keystone habit of paying off your credit cards EVERY month. In addition to being financially smart, it also avoids interest expenses and penalties as well.
Besides investing to take advantage of the full match from your employer’s retirement plan (401k, 403b, 457, etc…), if your credit cards have balances you should work to pay them off first before any other investing occurs. Why? I am the world’s biggest fan of investing while you are young and taking advantage of compounding interest; however, most of your credit cards are at a 15%+ interest rate. Let me tell you something about the stock market, I will never be able to promise a 15%+ return and if you do have an “advisor” tell you that, RUN!
Keystone Habit 3: Save, Save, Save…. on Auto-Draft
This keystone habit builds on habit #1. Just like in #1, I highly suggest establishing an automatic investment plan! Here is why, I have had numerous clients say, “I’ll just send you a check each quarter or every year to invest.” The current success rate of that comment comes in at a staggering 0%. We are always calling them to remind them to save. We can eliminate this issue with automatic contributions. Yay!
If you are saving for a home, car, baby, wedding or anything besides retirement, set up an automatic draft from your checking account to your savings account every time you are paid (just like #1). From an account standpoint, you can either add these funds to your emergency fund (in addition to your normal emergency fund goal) or open separate savings accounts for each goal. I don’t care which route you select, just make sure it is easy and convenient for you.
For retirement savings, hold on to your hats for this breaking news. Set up an automatic draft from your paycheck to your employer’s retirement plan (401k, 403b, 457, etc…) every time you are paid. Here is the other tip, increase this amount each year by 1% or 2%. I have a joke with my clients. I tell them that they are never going to come to me in retirement and say, “Darn it Chad, I saved way too much for retirement. Now I have to take extra Caribbean trips!” The same advice holds true for any IRAs or Roths that can’t be deducted directly from your paycheck. Once the money hits your checking account, establish an auto-draft to that account (this is usually done monthly).
Just as I noted in the opening paragraph, once you make saving a keystone habit, you almost forget that you are saving. Then you’ll look at your statement a few months later and say, “Wow, I can’t believe my account balance is that high already!” It is a beautiful thing.
Keystone Habit 4: Track Your Cash Flow and Budget Every Month
There have been very few clients that have mastered the art of cash flow management & budgeting prior to working with us. The part that upsets me the most is that it’s not that it’s difficult; it’s just time-consuming and requires a commitment. This is a vital keystone habit, and once it clicks, it is amazing but it can be hard to get over the first mountain.
Here is my suggestion. There is plenty of fancy software out there to track your budget; however, for the first 90 days or 3 months of tracking use the ole’ pen and paper method. Yes, it sucks to do this but it makes it much more real. And you need this to be real to make it a keystone habit. Once you get over that first mountain, (90 days/3 months) if you then want to switch to the tech side of budgeting, go for it. If you find that you are slacking with the tech budgeting, then go back to the pen and paper.
Here is a cool article from INC. on why Pen and Paper are still the best way to track.
I will leave you with a few lines from this great book, The Power of Habit.
Keystone habits say that success doesn’t depend on getting every single thing right, but instead relies on identifying a few key priorities and fashioning them into powerful levers.
The habits that matter the most are the ones that, when they start to shift, dislodge and remake our patterns [Insert your 4 keystone money habits here].
As always, thanks for reading! Questions and comments can always be emailed to us. That would be a great time to ask any specifics on the items above or any other questions you have!