This article is the first part of a 2-part article series about credit management and it will focus on how money habits are formed.
The truth is, your financial habits will determine if you are good at credit management or not. You need to be better at managing your credit accounts to avoid having debt ruin your personal finances.
If you look at the statistics, you will realize that we need to change a lot about how we use credit. Apparently, we have a lot of wasteful spending habits. We get extra food only to have it tossed out because we did not finish it (70%). Some of us go to dine-in establishments instead of just cooking your meals from scratch (54%). Others buy something without comparing prices or quality (30%).
As you can see, we have a lot of room to improve when it comes to spending. And since most of us use credit cards to pay for what we need, these irresponsible spending habits can lead to debt. Once that happens, things can get worse. Our credit behavior will be tested. If you have bad behavior when it comes to the use of credit, it will be easy for you to abuse it. You can expect that your financial situation will just get worse.
Make sure that your debts will not compromise your financial situation. To do that, you have to check your money habits. If you think that it needs improvement, then find a way to change it.
Understanding how money habits are formed
To change the way you handle credit, you need to understand how money habits are formed first. After all, our behavior is influenced by our habits. While it is a good idea to be a credit expert, it may not be enough. You need to practice that you know. You may have all the necessary knowledge about debt but if you cannot apply it, then it will be a huge waste. It can still make debt dangerous.
This is why you need to understand how to develop good habits. In effect, it will teach you what you need to do in order to get rid of the bad ones.
But before getting into all of that, what affects your money habits? There is a 4-stage pattern that influences your habits. Let’s consider how some people end up using retail therapy when they feel stressed.
In the scenario, the cue would be an unpleasant event that you just went through. This is the trigger that will lead your brain to act on something. The cue hints the possibility of a reward. Our natural instinct to survive has wired our brain to constantly analyze our environments for rewards. When our mind detects a cue, it means there is a reward close by. That will lead to our senses being activated so it goes on to the next step.
In this stage, your body will experience a force that will push you to act on the cues that your mind detected. The craving is usually linked to your desire to change something. Usually, that change will lead you to your reward. The craving for the scenario mentioned is the need to feel good about yourself. Whether you had a stressful day at work or you fought with someone close to you, there is a craving to have something positive.
This is the stage, you will act on the cravings. This is the habit that you will be performing. Your intention with this act is to fulfill the craving that you felt after experiencing the cue. In our pretend scenario, the response is retail shopping. After a bad day, you will give in to the craving to feel good by buying yourself something. Of course, your response will still be limited by your abilities. That means it will affect what you will buy and your payment method.
The final stage is the reward. Once you complete the response stage or the habit, you should experience the reward. In the scenario, your reward will be feeling better after having a bad day. When you buy, having the means to pay it will give you a sense of being in control. And acquiring something new will make you feel more positive about your situation.
A reward is usually something that either satisfies your cravings or teaches you something. It satisfies you because it will help you feel more content and relieved that your craving has been satisfied. But it will also teach you that this particular act gives you a positive feeling. Your mind will remember the reward.
That means the next time you feel bad, your mind will suggest retail therapy. That is how habits are formed.
Why you need to learn how money habits are formed
You might be wondering, why do you need to learn how money habits are formed? Well, its because you might find yourself needing to change some of them.
Just because your parents handled their finances one way, it doesn’t mean you will be using the same strategy. But as you watch them handle the household finances, their methods will be drilled into your subconscious. You will get used to doing it a certain way – only to find out that it does not apply to the lifestyle that you want to follow.
This is a common scenario among Millennials. In fact, a report revealed that Millennials spend money on lifestyle choices that their parents probably do not understand. But how did these people come to that? They changed their respective money habits.
When you understand how these habits are formed there are two things that you can do.
It will help you improve your habits
Among the money habits that you need to improve include budgeting, saving, and smart spending. These are the basic habits that you need to have. If you don’t have these, then you need to learn it. If you know how habits are formed, this should be easy for you to get used to.
It will help you get rid of bad habits
Sometimes, we get habits from people we are close to. We subconsciously follow what they do. But once we realize that its’ wrong, what can you do? You have to unlearn it. Fortunately for you, that is possible. As long as you know how to use the 4 stages of developing habits.
In the next part of this article series, you will learn more about how you can improve money habits and get rid of the wrong ones.