In the past twelve months, I have read twenty four books that fall into the category of personal development or business.
One book that really made an impact was Atomic Habits, a #1 New York Times Bestseller written by James Clear.
Habits are more fun to talk about than they are to execute!
We all know that routine habits are necessary to accomplish our goals, and our financial goals are no exclusion.
While Atomic Habits addresses the topic of habits in all areas of life, I’d like to evaluate and apply some of its points from a real estate investment/personal finance perspective.
The Compound Effect
When most of us think of compounding, we think of the five letter word: M.O.N.E.Y.
No matter how someone choses to invest their money, the same principle holds true:
Money earning compounding interest over time, produces wealth.
Commercial Real Estate is a very effective vehicle to achieve this outcome.
One of my favorites quotes from the book is “Habits are the compound interest of self improvement.”
If someone evaluates the compounding of their investment, the daily, monthly, or maybe yearly results will be hardly impressive.
BUT the results in ten years will be impressive, and the results in thirty years will be even more impressive.
If someone starts investing maybe five years earlier in their lifetime, those beginning five years compounded over time could make hundreds of thousands, or even millions of dollars difference at retirement age.
My point is that like money compounding, we usually don’t see profound positive changes in our lives after doing a habit for a short period of time. I would actually argue the net effect of some habits in the beginning have a negative impact on our lives!
Have you ever been to the gym and the next day you were sore, tired, and not a pound lighter?
The net results of one gym visit probably had some immediate negative effects, but if you continue to go regularly for six months and then a year, the impact of that daily habit will certainly have a positive effect!
What is true at the gym is also true with our wealth
Making a latte at home every day for a year may feel like a sacrifice with not much short term gain. Over time, if that savings is invested and compounded, the results will outweigh the sacrifice.
My latte example brings attention to two important points in Atomic Habits.
One percent of errors repeated day after day truly do become substantial over time
Although 1% of something seems insignificant today, a 1% difference over a period of time can have substantial impact!
$3.00 per day in most budgets does not seem significant, but $3 every day for 365 days is $1095. If $3.00 a day savings was invested every month for 30 years, at a 5% interest rate, that investment would grow to $75,943.60 thirty years later.
“Time magnifies the margin between success and failure.”
Tied to the last point, that extra $3 expense every day will not be very impactful by next week, but in thirty years from now, you would have over $75,000 towards retirement.
Executing the Habit
Habits are easy to discuss but difficult to execute.
Atomic Habits gives good pointers on how to actually do the habits needed to get the desired results.
The word identity can be translated into the phrase “repeated beingness”.
In other words, our identity is formed based on who we are and what we do on a repeated basis.
We tend to take pride in our identity and tend to do the things that align with who we say we are.
If we shift our mindset from “I want to invest in real estate” to claiming, “I am a real estate investor,” our habits will reflect this identity.
Likewise, doing the habits that are required of a real estate investor will help shape your identity as one.
Connecting habit and identity sounds great, but how do we get started? How do we make habits desirable?
Atomic Habits advises to make good habits more desirable and bad habits less desirable or invisible.
If a certain amount of monthly income goes directly to savings, the habit of using up that disposable income instead of saving it will be less likely because you’ve made a bad habit more difficult to execute.
Habits can be FUN
You may be thinking, yeah right…
Atomic Habits discusses how our brains respond to desire.
We may think that habits are just a necessary nuisance we must stick with to reach our goals; once these goals are achieved, then we will be happy.
It turns out that there is dopamine released in the brain not only when we get what we want but when we are anticipate getting what we want.
This means that the result may be what we want to achieve, but our brains get just as much enjoyment in striving for the result as we do arriving at the result!
I am not a plant person by nature, but after reading Atomic Habits, I decided that I needed to buy a bamboo plant to put on my desk….Let me explain.
The book talks about how for the first five years of bamboo’s life, it doesn’t grow very much above the soil.
Imagine bamboo being planted next to another type of plant.
Over five years, the average person may watch the other plant grow, get stronger, taller, change with the seasons, bear fruit, etc.
Meanwhile, that bamboo plant appears to be completely stagnant. Nothing positive seems to have happened for the past 5 years of its life. But something has been happening beneath the surface….
The bamboo didn’t grow much above the ground, but for the past five years, the bamboo plant has been doing something much more effective: it has been growing a very deep and strong root system.
Almost overnight, the bamboo will shoot up, and will probably be taller, stronger, and virtually indestructible compared to the other plant.
Compare this to someone who has diligently invested over the course of several years or decades. For years this person may have seemed modest or not keeping up with others. But something was happening in the background that others couldn’t see. They were establishing strong financial roots.
While Atomic Habits applies to all areas of our lives, I found the book extremely helpful from a financial perspective.
Habits over time compound the same way that money compounds. Little amounts over time seem insignificant, but eventually, the compounding effect takes over, and the results will amaze you!
If you would like to discuss Atomic Habits, this blog, or anything relating to Commercial Real Estate, let’s talk!