If you choose to pursue financial independence and an early retirement, you will need to reject many of the popular, preconceived mindsets and behaviors that you’ve been taught about your relationship with money.
Over the past two decades, the average age at retirement has been increasing. Studies predict the average age of retirement for Millennials may reach 75 due to the growing costs of rent and prevalence of student loan debt.
The good news?
You don’t need to follow the same financial path as your peers (no matter what generation you were born in).
The “bad” news?
To reach retirement earlier than your peers, you will need to handle your money in a different way as well.
Pursuing financial independence will require self-education, practice, and persistence. You may or may not have the support of your friends, co-workers, and even family members… but you will need to make financial changes in your own life regardless of their own money habits.
In this post, you’ll learn more about the five stages behind every major life change, how these stages apply to your personal finances, and how you can use this model to stay committed on your journey toward financial independence.
The 5 Stages of Financial Change
In the academic world, the stages of change are more formally recognized as the “transtheoretical model of behavior change.”
This model was first proposed by psychology professors in 1977. The model is often applied to health-related changes, such as quitting smoking, starting a new exercise or diet plan, and managing anxiety and depression.
Here are the five stages:
- Precontemplation (not ready to change)
- Contemplation (considering change)
- Preparation (getting ready for the change)
- Action (making the change)
- Maintenance (reinforcing the change)
While you typically progress sequentially through the first four stages, it’s possible to “backslide” and revert to an earlier stage if maintenance is unsuccessful (breaking your diet during the holidays, for example).
This model not only applies to physical behavior changes but can also be applied to belief changes or decision-making as well.
Let’s take at how you may journey throughout these stages as you make significant changes in your financial habits.
During the precontemplation stage, an individual is not seriously considering making a change. In fact, they may not realize that a change is necessary at all.
In the context of a health-related issue, a person in the precontemplation stage may assume they are totally healthy – perhaps unaware that their high cholesterol or blood sugar may already have them on a trajectory for a heart attack or diabetes down the road.
If you have just started your professional career, you may find yourself in the precontemplation stage of your retirement planning.
Perhaps you are contributing a small percentage of your 401k toward retirement each month. What you may not realize is that contributing just 5% of your salary is going to place you squarely in the “retire at 75” club.
To move out of the precontemplation stage may require a “financial epiphany.” This could be saving up to buy a house, preparing to have a child, or earning a salary for the first time. At this point, you’ll realize it’s time to make peace with your financial past so you can reach your goals.
The same year that psychology professors created the “model of behavior change,” film director Woody Allen was attributed in the New York Times for his popular quote, “Showing up is 80 percent of life.”
Just by “showing up” to read this post, you may have already progressed out of precontemplation into the next stage of behavior change: contemplation (surprise!).
During the contemplation stage, an individual is aware of their problematic behavior but are still weighing the pros and cons of change: Can I make time to exercise without hurting my career? Will my friends support me in my decision to quit smoking or drinking?
In a stage of financial contemplation, an individual may be considering their financial goals and the associated trade-offs.
- Should we be focused on saving up a down payment for a home or paying down student loans instead?
- Is it worth the inconvenience of downsizing our home or moving in with roommates to save additional money?
- Can we commit to meal prepping for a few hours each Sunday night to reduce spending on lunch during the work week?
An individual in the preparation stage has determined the pros of change outweigh the cons. At this stage, they may start performing research, creating a plan, or making small steps toward their improved for behavior.
If you are someone who wants to lose weight, your preparation might be purchasing a healthy cookbook, grocery shopping for nutritious foods, or signing up for a gym membership.
Many times, it’s tempting to skip from the contemplation stage directly into action (which we’ll discuss below). It’s important to spend time in the preparation stage to lay a framework for success.
You may have to remove barriers from your financial goals as well. This could involve learning more about debt payoff strategies, calculating your net worth to understand your current situation, or building a solid budget that organizes your finances.
In this stage, individuals begin to actively change their behavior. This decision is often one of the shortest stages of change – most of the effort is either exerted in (1) building motivation during the contemplation the stage, or (2) maintaining and reinforcing change.
If quitting smoking is your health-related behavioral change, then the action stage would be the first few weeks of cessation. The behavior change requires consistent, active effort to make. You may be using aggressive strategies like substituting a new behavior in its place, rewarding yourself for the proper behavior, and avoiding any scenarios that trigger the old behavior.
There are many ways to take action and improve your personal finances. You may start scheduling recurring payments on your debt, setting aside an additional portion of your income with direct deposit, or creating a budget to keep yourself living within your means.
In a successful behavioral change, the maintenance stage will have the longest duration. The goal of the maintenance stage is to reinforce the new behavior to minimize the chances of a relapse. With time, the new behavior will become second nature.
It is not uncommon for individuals to relapse back to a previous stage. A successful behavior change will depend on how an individual responds to this situation:
Do you prepare yourself to eat healthily by going grocery shopping and planning your upcoming meals – or do you tell yourself that you’ll try again next New Year’s?
Financial independence is a long-term objective that requires maintenance as well. You may have to dip into your emergency fund to cover an unexpected expense. You might splurge and make an impulse purchase that falls outside your budget.
It’s important to avoid letting one setback justify additional bad behavior. Even if you aren’t perfect with your money, you can find ways to improve your finances each and every day.
How can you maintain your positive personal finance habits to minimize the impact of a setback?
- Continue learning new financial principles with personal finance blogs and books
- Surround yourself with like-minded individuals who share your goals and values
- Be publicly accountable for your goals by sharing them with family and friends
- Automate your behaviors with recurring transfers, payments, and direct deposits
To do something spectacular with your personal finances, you will need to adopt different beliefs and behaviors about money that may be different than your peers.
You can make this financial change easier by understanding the how the “stages of change” model applies to you and your personal finances, assessing your current status in the model, and finding ways to reinforce the right behaviors until our reach your goal.
No matter how long you’ve been focused on your personal finances – whether you’re just contemplating your goals or maintaining your progress – there are strategies you can use to make good financial behavior easier.
How do you stay committed to maintaining the positive financial changes in your life?
Aaron is a lifelong entrepreneur and internet marketer who started Personal Finance for Beginners to share experiences and insights from his own financial journey as he pays down student loan debt, sticks to a deliberate budget, and saves and invests for the future. You can find him at Personal Finance for Beginners or on Twitter @PFforBeginners.