7 Habits of a Highly Effective Financial Life

Connecting Stephen Covey’s 7 habits to your financial life

We all strive to be highly effective in the areas of our lives that are most relevant to us. It’s part of the progress of humanity. (Although some people’s choice of areas to be highly effective in may cause us to question that progress!)

Striving to improve our financial situation is a common area of focus for many of us. We realise that being highly effective in our financial lives is critical if we are to avoid the abyss of financial failure.

Here, my intention is to present a framework for you to develop effectiveness in your financial life to increase your chances of success.

I assume that everyone has read Stephen Covey’s The 7 Habits of Highly Effective People at least once. I know many (including me) who have read this classic more than that.

During my most recent reading, I focused on applying these habits to personal finance. So, at the risk of misrepresenting or misinterpreting the original, here are my thoughts.

1. Be Proactive

We are often quick to blame external factors for whatever happens. The economy, the government, the weather, the company and many more are blamed.

Everyone faces the same external factors, but those who are proactive can benefit instead of being a victim.

Reducing debt levels as interest rates rise, working harder/smarter to earn additional income and structuring your situation to avoid paying extra taxes are all examples of proactive actions you could take to improve your finances.

Covey discusses the gap between the stimulus and our response. He encourages us to be mindful of increasing the gap to improve the quality of our response. The smaller the gap, the more likely the response will be reactive.

2. Begin With the End in Mind

This is possibly the most-quoted habit for good reason.

Having clear financial goals and a clear plan to achieve them is essential for success.

Of course, the “end” should be achievable and the plan effective. Aiming for Elon Musk level wealth with a plan to invest 100% in Bitcoin probably is neither.

Now, before I am drowned in a tsunami of crypto hatemail, let me point out the weasel word “probably”, but I doubt even Elon would sell all his Tesla and Twitter shares and put the proceeds into crypto (but he might!). Anyway, back to reality —

As with all aspirations, the goal and the plan provide you with definite measures of success and the motivation to continue.

A word of caution when we apply this principle to finances, the goal should not be a number. It needs to be what the number means.

For example, the goal could be “a home we own outright, the ability to fund our children through college and a retirement fund able to provide us with a comfortable lifestyle” — whatever works for you. You then convert those goals back to a dollar amount.

The goal must be whatever the money can enable, not the dollar amount.

3. Put First Things First

You should prioritize your goals and focus on achieving the most important goals first. Working with an effective plan will help avoid emergencies derailing your progress.

This is particularly true of working with an effective financial plan. Reaching important goals first should speed up your progress towards later goals.

For example, paying off all debts first (an important goal) will ensure you have more free cash to invest for retirement.

There is an added bonus for your financial plan. When you have an effective plan that is working, you are less likely to be distracted by alternative strategies.

This is not (I’m using this term carefully) fool-proof, and the temptation to pursue a new “bright, shiny object” is always there, particularly when dealing with investments. Sticking to a plan that is achieving the milestones is preferable to chasing new (riskier?) ideas.

But, there will be situations you need to change a plan. Priorities, circumstances and opportunities can change, which may necessitate changes to the plan. The key is to carefully and rationally evaluate the proposed change rather than making impromptu, ill-considered changes.

Always be mindful of the gap between stimulus and response.

4. Think Win-Win

Put simply, you should be looking for ways to increase the pie rather than how you can get a bigger piece of the existing pie. Adopt an abundance mentality in preference to scarcity.

This usually involves a degree of collaboration. When dealing with financial collaboration, a high degree of trust is also involved. Unfortunately, misplaced trust in financial matters has led to many catastrophic financial outcomes.

However, it is unlikely that any one person (including you) will have the necessary knowledge and skills to be competent in all areas of finance. Assembling a team of experts to guide your decisions is essential to cover your “gaps”.

These days, assembling a team of experts is easier than ever. There are endless newsletters (paid and unpaid), podcasts, blogs, websites and even (be extra careful with this one) social media that provide authoritative information and guidance.

Clearly, you need to be selective to ensure the information is accurate and be aware of the bias of the provider of the information.

For example, a property guru may be a genuine expert in property investments and provide valuable information, but it’s unlikely you will be informed properly about alternative asset classes.

And, if the guru (no matter what the area of expertise is) is promoting products, be super careful. The product may be a great investment, but is it a great investment for you?

5. Seek First to Understand, Then to Be Understood

This is particularly relevant when developing your financial life with a significant other. You may have your financial journey mapped out and be heading off, but you must make sure your partner is on the same journey.

Taking the time to agree on goals and plans to achieve those goals is critical to achieving mutual commitment. With mutual commitment, you will have less chance of having to play the blame game when the going gets tough (and it will).

But, more importantly, with a clear understanding of the goals you are working to achieve, you will be able to support each other along the way.

6. Synergise

This adds an extra layer to the previous topics.

Whether you are collaborating with your team of experts or your partner, you need to be seeking (as Covey explains it) the third alternative.

This is an alternative that no one thought of individually, but you seek to discover an even better idea by combining ideas.

Now, in the finance area, I doubt there is an undiscovered original idea (legal or illegal), so the best you can hope for is an idea to improve your current options.

But remember my warning above. Don’t chase new options if your existing plan is achieving your goals — more is not always better!

7. Sharpen the Saw

There are 2 aspects of your financial life we need to discuss here.

The first is the necessity to revisit your plan regularly to make sure it is still on track.

For example, if your plan is “to save $2,000 per month”, a quick check of the account holding your savings to make sure it is at least $2,000 more than last month is all that is required.

And, it may be prudent to also review your living expenses as part of the sharpening process. With high inflation, you need to be aware of expense items dragging on your budget and adjust your allocations to preserve the overall plan.

You also need to conduct a detailed review of the overall plan at least annually to make sure you are on track and make any required adjustments.

The second aspect of sharpening the saw is your skills.

Some will say, “But I don’t understand any of this finance stuff”, to which I would say, “everyone started there!”

This is where it gets complicated, and we reach the “it depends” conclusion.

Because the level of skill required will depend on the complexity of your financial plan.

If you plan “to save $2,000 per month and invest in an S&P 500 index fund,” which has historically generated a 10% average compounding return over many years, all you need to understand is

• What is an S&P 500 index fund (a relatively simple concept) and
• Will $2,000 per month added to a fund generating a 10% average compounding return over the years to your target date be enough (a relatively simple calculation)

There’s not much skill/knowledge required, and you can easily enlist help to do the mathematical calculation. Then it’s just a case of “do it”. It’s a passive strategy.

But . . .

If you plan “to save $2,000 per month and invest in a portfolio of individual equities and direct property”. Now the required skill level is very high, and the “sharpening” process would be extensive and ongoing.

• Knowing the valuation techniques appropriate for each type of asset
• Researching each asset to assess whether to invest
• Managing the portfolio
• Deciding the most appropriate time to sell

are some of the skills required for this strategy. You need to be willing to invest significant time in gaining and maintaining these skills.

It’s your call!

So there you have it. 7 habits that have the potential to make your financial life more effective. You could adopt all or some of these ideas, but please, do take action to improve your finances.

Your future self will thank you profusely for your wisdom.

And, of course, I must include the requisite warning —

Although I know you (as a writer always knows his audience), I do not know the details of your personal financial situation, so I cannot give you personal financial advice. The opinions, ideas and information above are general advice only, and you need to assess whether all or any of the above applies to your situation. I recommend you discuss any planned changes to your finances with your financial adviser before taking action.