Change bad spending habits in 5 steps | Your Brain on Money

The habits that are small at the beginning, like grabbing a chocolate bar when you're checking out at the grocery line, may be fine at the beginning. But as you go along, you can see that habits are hard to break. There are triggers that we all have that lead us to these habits that are invisible for us to see every single day.

Why are bad habits around money so hard to tackle? In the course of your day, about 40% of the things you do are habits. All of this happens behind the scenes without you being aware of that. Because you have no control, it's also hard to break it.

When we talk about money, there are ways that we have cues, routines, and rewards. Sometimes we get so connected to that reward that comes from giving or spending that we continue to do that in a routine way that hurts us.

But the great thing is we all have the capacity to change. Small behaviors can have really big impacts over time just through the power of habit.

Getting rid of bad habits, or forming new ones, will have an impact all the way across the board. Not just with your money, but also how you feel mentally, emotionally, and physically.

How can you identify what's holding you back? Can you forge healthier spending and saving habits that unlock your financial potential? This is "Your Brain on Money." Before our two favorite neuroscientists, Dr. Cerf and Dr. Kable, explain how our brain forms habits, Dr. Cerf is going to tell us how he got into the brain side of things.

After many years of working as a hacker, I ran into Francis Crick, Nobel Laureate for discovering the DNA, and he essentially learned about my profession, penetrating banks and the government. He said, "You might as well try to implement that in a much bigger and much more important question, which is how our brains work." And with his endorsement, I moved from hacking computers into hacking humans' brains.

As a brain hacker, how do habits creep their way into our brain? Habits are patterns of existence in our brain that operate without us paying attention to them. Some habits are so frequent that nature said, "You know what, this one we could hardwire into the brain." That's what breathing is. Something that's natural, as soon as you're born, it just works.

And then over the course of our life, there are many things that we do frequently that the brain says, "Let's move them to a system that is a habit." It sees that you drive to work every day in the same route, and it says, "You know what? Let's help the person." Instead of having to navigate, we just have to have one mechanism ignite it, and from then on everything's gonna happen automatically.

The location in the brain, the striatum, where it happens, we basically can monitor how habits are formed, and what it takes for each process to happen.

You can do a neuroimaging study where you ask someone to repeat the same thing over and over again. Initially, there are lots of areas of the brain involved. But as you do the task over and over again, what you see is fewer and fewer areas that were necessary the first time through. It's only using those neurons and those brain areas that are absolutely necessary in order to get the task done.

It's also hard to break it because now you have to change something that your brain worked hard to make you not be aware of.

So what do some of these money habits look like in our daily lives? If my wife was here, she'd probably tell you some of my quirky habits.

Dr. James has seen a lot of different money habits with his clients, and he's here to tell you that there is hope in tweaking them.

Some of the things I've seen for people is that they might have the resources to pay for things, but somehow they spend all they have because they got used to not having money. They got used to not having extra resources. They got used to maybe not even saving. Hyperfocusing on how much they have, or are they doing the right thing, or the latest trends.

When I think about shaping habits, I do think that we can replace them, but it takes real intentional work. If you just say, "I'm gonna read one page a day or one chapter a day," you will eventually finish the book. And if you finish the book, then you get to another book. That's a great habit to build that started on one page a day.

If we see it as being able to save a dollar or a few dollars, that gets you to multiple dollars that can get you to saving.

You know, saving $50 a month is great. But saving $50 a month every single month, putting it in a savings account, the better off you will be because of the magic of compound interest. That is what really makes a difference in your financial life.

What we often make a mistake of doing is trying to do everything all at once. I'm going to stop spending on takeout, I'm going to save for retirement, and I'm gonna walk to work to save money on gas. Well, that is a lot of change to manage all at once. Instead, a much better way to implement new financial habits is to do one at a time, and stick to something that you had set out to do.

So, what specific course of action can we take to form better habits?

Building a better set of habits in your life will start with understanding what stage of change you're in. So you may be in a 'place of denial,' like, 'Ah, I maybe not need to change this habit.'

So just by saying, "You know, I have a habit, and I don't like this habit," you already did one small step towards changing it.

When you get to the point where you are ready to make a change with the habit, that's in the 'contemplation stage.'

So, let's say you're in the habit of whipping out your credit card and getting a coffee every morning. If it's feeling good for you, make sure it works for your finances, and if it does, keep on moving forward. If it feels not so good for you, that's usually an indication that you can check in with what's going on financially.

Then you move to a 'preparation stage' of actually planning for this change.

The more you can associate positive habits or neutral habits with your money, with something good, the better off we are.

Then you're at 'action,' where you're actually putting your foot on the pedal and things are changing— where we create a new habit. We're integrating this into our lifestyle.

What I heard with this person with this latte example is that they need a lot of time to kind of prepare themselves before they get to work. So it could be, "I'm gonna get to work like 5, 10 minutes early and park a little bit farther away so I can have that time to take that walk to really get in my head, so I can start my day nice and fresh."

And then 'termination' is the last stage where we may not have the urge of that habit that we were looking to break.

After a few times, there are gonna be two habits, and if the second one overwhelms the first one, at some point, your brain's gonna just cut the original one, and you'll have a new habit.

As a therapist, I'm always gonna say that self-evaluation should be a habit. I mean, I'm number one in that camp. But honestly, I think a lot of people don't do that enough. There's so many things that come from awareness and reflection, and maybe even accountability.

One way you can support forming a new habit is getting more social. Tell friends, family members, and maybe even co-workers that you want to make a change.

Associations, connections become really important when we share with a friend. We now associate that friend with our goal.

The sky is the limit when it comes to how you actually behave and act with money. And holistically, things will be better for your life. If you made the effort to just get with us to this moment in the video, you're already a little bit better.