Welcome to the fifth post of the millionaire mindset series. This time I focus on how to build good habits according to James Clear’s book Atomic Habits, and how important it is in order to build wealth an eventually become a millionaire.

But, before I continue, let me recall all the previous post written so far for this series:

  1. The Money Blueprint — What it is and why is so important to attract wealth?
  2. Wealth Principles — A comparison of how the rich vs the poor think.
  3. Millionaire Common Traits — Let The Millionaire Next Door show you millionaires are made.
  4. Money Personality Types — Learn what are the common money personality types and how they influence your money-related decisions.

Most, if not all, the information written on this blog post has been taken from Atomic Habits. This is the best book I’ve read in 2020. I found it insightful, full of great content and with practical and useful advice. This can be a life-changing book for anyone who takes it seriously, and the least I could do is to collect my notes and share some examples of how I personally apply James methods with my readers. I hope this will make you a bit better and a bit closer to achieving what you want in life. Remember to buy his book if you find it interesting (UK, US, España), this blog post only covers a small part of the book content.

What Are Habits?

Habits are the compound interest of self-improvement. Similarly as money grows through compound interest, the effects of our habits expands as we repeat them.

They seem to make little difference at first but the impact they deliver long term can be massive.

If you are able to improve 1% every day, you will end up with results that are nearly 37 times better after a year.

How Atomic Habits Compound
One step at a time becomes a huge step overtime

This can guide your life to a very different destination. The choices we make today outline the difference between who we are and who we could be. Success comes from the compounding of positive habits, these make time our ally.

Positive habits are those that help you increase productivity, knowledge and relationships. Imagine how far it can get to learn one new idea for the rest of your life. This is how geniuses are made.

Negative habits are those that increase our stress levels, make us think negatively or feel anger.

Focus On Systems Instead Of Goals

Goals are good for setting a direction, but systems are best for making progress.

The purpose of setting goals is to win the game. The purpose of building systems is to continue playing the game. It’s the cycle of endless refinement and continuous improvement that determines our progress.

Long term compounding requires long term discipline and reaching goals is only a momentary change.

Your Identity and Habits

Many people begin the process of changing their habits by focusing on what they want to achieve when they should focus on who they wish to become in order to build identity-based habits.

Good habits can make sense, but if they conflict with our identity, we will not put them into action.

For instance, you may want more money, but if your identity is someone who consumes rather than creates, then you’ll continue to be pulled toward spending rather than earning.

Identity-based habits
The process of identity habits producing and outcome

How To Change Your Identity

Your habits are how you embody your identity. The more you repeat a behaviour, the more you reinforce the identity associated with it.

These are a few examples:

  1. When you make your bed every day, you represent the identity of an organised person.
  2. When you write each day, you embody the identity of a creative person.
  3. When you train each day, you symbolize the identity of an athletic person.

Habits are the path to changing your identity. Changing what you do will change who you are.

But how do you do that?

First, decide the type of person you want to be. Saying I want to become a millionaire is not enough. This step is about deciding what you want to stand for, what are your principles and values or who you wish to become.

Second, prove it to yourself with small wins.

In my case, I want to be a successful design engineer, and lead a small, but positive team. Therefore I spend between 30min and one hour every morning learning new engineering concepts.

How Habits Work – The Habit Loop

Habits are mental shortcuts learned from experience and formed through repetition. The ultimate purpose of habits is to solve problems taking as little energy and effort as possible, so we can allocate our attention to other tasks or new challenges.

The process of building a habit can be divided into four simple steps: cue, craving, response, and reward.

Habit Loop
Habit Loop by James Clear

The cue triggers a craving, which motivates a response, which provides a reward, which satisfies the craving and becomes associated with the cue. This four-step process allows you to create automatic habits.

This circle is known as the habit loop.

How To Create A Good Habit In 4 Steps

The 1st Law: Make It Obvious.

The first step to changing bad habits is to become aware of your behaviour. That’s why James recommends getting started by creating a list of all your daily habits and classify them by good, neutral or bad habits. That way we know what habits we need to work on improving.

Time and location are the most common cues. We crave eating that biscuit around 4pm, or having a cigarette when we are at pub. 

A way to change this is to follow a predetermined plan:

  •  I will do this at that time in that location.

Personal example: I will study English engineering vocabulary at 7am every day at home.

Another way is to follow the habit stacking formula: 

  • After I do this habit, I will do this new habit.

Personal example: After I come from work I will go for a run.

As habits are initiated by a cue, and we are more likely to notice cues that stand out, the environment where we live and work play an important role in our habits. That’s why we should pay attention to designing an environment for success and think in terms of how we interact with the spaces around us.

Personal example: I place most fruits on an easy to reach and visible place, usually on top of the kitchen table. I do exactly the opposite with chocolate, placing it far behind in a cupboard.

The 2nd Law: Make It Attractive

The more attractive an opportunity is, the more likely is to become a habit-forming. Then if we want to increase the chance of taking action, we need to make it attractive.

One method to find a behaviour attractive is to do it at the same time you do one of your favorite things.

James calls this temptation bundling: 

“After [HABIT I NEED], I will {HABIT I WANT].”

Here’s my personal example: After I have washed the dishes, I will read and relax on the couch for 30 minutes”

This works well with me because I give to myself a healthy reward after having done something that I don’t enjoy doing but needs to be done.

I remember those days when I was a smoker. I used temptation building with cigarettes all the time. I would tell myself: “Do this you don’t like and then you treat yourself with a smoke”. Then I stopped smoking and substituted it with eating unhealthy products such as biscuits or chocolate. Now I am slowly changing negative habits for a good one which is creating a turning point in my life.

Another effective thing we can do is to build better habits by joining a community where your desired behaviour is the behaviour you would like.

It is commonly said that we become what we are surrounded by. This was one of the main reasons why I started with this blog. I could not meet people who saved and invested. As a consequence I spent and invented less than I wanted to. After joining the FI/RE and personal finance community my savings and investing habits have improved.

The 3rd Law : Make It Easy.

Sometimes we spend so much time figuring out what’s the best approach to doing something that we never get around to actually taking action. In order to master a habit, the key is to start with repetition, not perfection. We learn most of the lessons by practising, not planning. We must first establish the habit before it can be improved.

Energy is precious, and it’s human nature to preserve as much of it as we can. The more obstacles we have on our ways, the more difficult the habit becomes. That’s why creating an environment where doing the right thing is easy works well.

This third law is a technique that the FI/RE and PF community knows inside out. The KISS principle which stands for Keep It Simple, Stupid and states that the simpler works better.

When I started with this blog, my investing strategy was rather complex. I invested in FOREX, Index Funds, ETFs, single stocks and over 10 P2P lending platforms. Now most of my monthly contributions are fully automated to buy a global index fund.

The 4th Law (Reward): Make It Satisfying.

We are more likely to repeat a behaviour when the experience is satisfying. So, in a way, if we want to cultivate habits we need to create positive emotions.

The very simple reason why people can’t stick to good habits is because of the delayed rewards, whereas the opposite happens with bad habits, where rewards are immediate.

Because of the way we are wired people tend to chase quick hits for satisfaction.

James states that to get a habit to stick you need to feel immediately successful even if it’s just in a small way.

I unconsciously utilized this strategy after I stopped smoking when I decided I would invest all the extra money I saved into ethical investments. So far it is working superbly. Month after month I keep having that satisfying and fulfilling feeling just after contributing the savings in the 45K Project Fund.

I hope you found reading this post interesting. As usual, comments or questions are welcome.

Tell me:

  • What habits you would like to change.
  • What you could do to avoid bad habits and start new good ones.