For those of you that haven’t read Atomic Habits, I think it’s worth getting a copy for yourself. Yes, it is that good. But there is one idea from the book I’ll share here that I think is worth exploring further.
James Clear says that habits or rather, changing habits and behavioral change, has three layers (you can picture a bullseye with three concentric circles). The outermost circle is the outcomes. The middle circle is the processes. Finally, the innermost circle is identity.
The fact is, change is linked to one of those three layers, but it is strongest when you change your identity. Think about the habits that we typically want to create: I want to lose 20 pounds or I want to run a marathon. These goals are focused on the outcomes. As James says, “Outcomes are about what you get. Processes are about what you do. Identity is about what you believe.” There’s nothing wrong with focusing on outcomes or processes, but James says the problem is the direction we want to change. We think that focusing on the outcomes (I want to lose 20 pounds) will help us change our identity (i.e., our beliefs of what kind of person we are). But we have it the wrong way around. We should first focus on changing our identity and beliefs (i.e., becoming the type of person who moves every day) and the processes and the outcomes will come shortly after.
For example, if you are the type of person that eats healthy and works out at lunch, you aren’t trying to decide between eating fried chicken or a salad for dinner. You’re not the type of person that eats junk food or anything that messes with your body so you never even consider unhealthy fast food.
The three layers as it applies to money
James Clear’s change framework helps explain why, at least for me, my wealth never took off. Although I saved money here and there by keeping expenses low, using coupons and coupon apps, and watching my bank account increase as I socked away any extra money I received, I had a ‘frugal’ mindset. In addition, these were all outcomes and processes that came out of my identity of being a frugal person. Although there’s nothing wrong with the outcomes or processes I focused on, when I wanted to become wealthier, I thought investing in stocks or purchasing the next big crypto would be the answer. It helped, but it wasn’t the answer.
Focus on identity first and then processes and outcomes
When I realized I didn’t want to just keep going through the motions and instead, have financial independence and possibly retire early (FIRE), I set about changing the things I did and the goals I had (i.e., the processes and outcomes). For example, I signed up for brokerage accounts so I could invest in stocks and ETFs, and I set goals of investing a certain amount of money every month. Unfortunately, I didn’t do the work of diving deep into my identity and changing my beliefs from a frugal person to an abundant person. Now I’m not saying one or the other is better, just that the two are different and one identity better served my goals of FIRE while the other didn’t.
When I had a frugal mindset, I:
- tried to save money in the short term
- bought cheap things and continually bought cheap things
- looked for places where I could save pennies, but missed or didn’t spend enough time on the areas I could save thousands
- hated debt and didn’t want anything to do with debt
- spent my time (arguably a more precious resource) to save money without understanding the value of my time
Contrast this with having an abundance mindset, I:
- tried to save money for the long term
- bought quality goods and maintained them so I didn’t have to keep buying the same goods
- focused on the big purchases in my life
- understood that debt can be an instrument for building wealth
- understood the value of my time and didn’t trade it for pennies or nickels
Changing your identity is the hard part
Changing your beliefs about money is the difficult part. If you manage to change your beliefs about money, you can then figure out the processes and outcomes to focus on as part of the change. Consider another idea once you have changed your beliefs: every dollar you spend is a vote for the person you want to become.
Spend a dollar on the latest and greatest tech toys, gadgets or other goodies you don’t need? It’s a vote for someone that is trying to continually keep up with the joneses.
Spend a dollar on the cheap item you know will break after a few uses? It’s a vote for someone thinking about their short term wealth.
Spend a dollar on purchasing a fraction of a stock? It’s a vote for someone wanting to grow their money.
Spend $10? That’s 10 votes. Spend $1,000? That’s 1,000 votes.
A different lens to look at your budget
If each dollar you spend or use is a vote for the type of money person you want to become, then your budget (and actuals) is a look at whether you voted for the person you want to become or not. So I don’t look at needless purchases as a waste of money, but rather, as behavior that does not align with the type of person I want to be (or am).
This way of looking at my behavior means I’m not being critical of myself, but of my behavior and I can better disconnect my behavior from the person I am. If instead, I looked at my bad money habits as something that I am, I’m more likely to reinforce that identity.
On the other hand, if I am spending in ways that align with who I am / want to be, I reward myself whether it’s getting a good book or eating a good meal so I can reinforce those activities.
Putting all this together:
- Although you can approach change through outcome (I want to lose 20 pounds) and processes (I’m going to run for 30 minutes every day), the deepest and most effective level of change is changing your beliefs (I am a runner).
- Applying the same thinking to money, changing your beliefs about money can be the best way to develop better money habits (whether it’s earning, saving or growing your money).
- Focus on the kind of person you want to be with money, and not on the processes or outcomes. Don’t focus on saving X amount every month or earning mid six figures by a certain age, focus on having an abundant mindset or being the type of person who gets the most value out of every dollar.
- Every dollar you use or spend is a vote for the type of money person you are. Looking at your budget and removing all necessities of rent, food, utilities, etc., what are you spending your money on? Are you spending your money in ways that the type of person you want to be is?
- Look at your behavior as separate from who you are. When you see bad money habits, see that the behavior does not align with the type of person you are or want to be.
- Reward yourself for activities that align with who you are.