The Financial Consequence of Habits:

I was listening to a podcast earlier this week on the power of habituation in our lives. Habituation refers to the psychological phenomenon where the more we are exposed to something, the less value or pleasure we derive from it over time.

The neuroscientist was using this concept to explain why over time we are less satisfied with aspects of our lives that once made us happy (think: our partners, our kids, our homes).

That is when it hit me. In the world of personal finance, the concept of habituation plays a significant role in shaping our spending and saving behaviours.

This concept has profound implications for our financial well-being, influencing how we manage our money on a day-to-day basis.

Think about the common daily habit of buying a morning coffee for $5. Initially, the experience may bring a high sense of satisfaction—something small to start the day.

However, as days turn into weeks and weeks into months, the novelty wears off, and so does the enjoyment you get from the routine. What once felt like a treat now feels like a mundane expense.

This diminishing value of spending shows us the financial consequences of habituation: the tendency to seek greater levels of spending to maintain the same level of satisfaction.

As the initial $5 coffee loses its appeal, we may find ourselves gravitating towards pricier alternatives or indulging in additional purchases to recapture that fleeting sense of pleasure. This is exactly why large coffee shops will encourage you to add a croissant on to your order.

What started off as a 3$ coffee becomes a 5$ latte which becomes a 5$ latte with a croissant – you get the idea.

And the same experience happens with online shopping, eating out, or travel.

On the other hand, when it comes to saving money, habituation often works in the opposite direction.

Most people save sporadically, and it becomes a burdensome task rather than a rewarding habit.

Because saving lacks the daily reinforcement that spending provides, it can feel like an uphill battle, leading to procrastination and inconsistency.

So, how can we leverage the principles of habituation to create healthier financial habits?

The key lies in embracing intentional spending and automatic saving.

Intentional Spending:

Intentional spending involves consciously allocating your financial resources towards experiences and purchases that align with your values and long-term goals.

Instead of mindlessly indulging in habitual expenses, like daily coffees or impulse purchases, take a step back to evaluate the true value they bring to your life.

By breaking free from the cycle of habituation, you can redirect your spending towards novel and meaningful experiences that genuinely enhance your well-being.

This may involve allocating money towards travel, skill-building activities, or investments in personal development, where each expenditure brings a renewed sense of satisfaction and fulfillment.

Automatic Saving:

On the saving front, automating is a powerful tool for combating habituation and creating consistency in financial planning.

By setting up automated transfers from your paycheck to your savings account or retirement fund, you remove the need for active decision-making, making saving an effortless process.

Automatic saving takes advantage of the inertia of habituation, channeling it towards positive financial behaviors.

Over time, as saving becomes ingrained in your routine, you’ll experience the satisfaction of watching your savings grow without the burden of constant deliberation or self-restraint.

In essence, the key to mitigating the financial consequences of habituation lies in consciously directing your spending towards what truly matters to you while harnessing the power of automation to cultivate consistent saving habits.

By breaking free from habitual spending and embracing intentional spending, you can enhance your financial well-being and achieve greater peace of mind in managing your finances.