How to break your worst money habits

Using some simple rules and tools can help you save plenty over the long haul.

Break bad habits: The science of habit change

Does it really take just 21 days to change a habit? Experts say it’s not that simple. “Breaking bad habits successfully depends on your readiness to act,” says Heidi Beckman, clinical health psychologist at the University of Wisconsin Hospital and Clinics and speaker on financial behavior change.

John Ulzheimer, president of consumer education at SmartCredit.com, agrees. “If it was easy, we’d all have big savings accounts, and none of us would have credit card debt,” he says.

Beckman says habits change more quickly when you’re in the action stage versus the ambivalence or preparation stages that come before. To catapult yourself into action, she recommends using this three-step approach daily.

1. Create a positive picture in your mind of the result you want, and act as if the bad habit is gone. Use a negative picture of the current stressful result of the bad habit to push yourself further toward action.

2. Identify and focus on your positive financial habits, as proof you can do things the right way.

3. Create simple rules to fall back on when tempted, such as: “Don’t browse shopping websites until all my bills are paid this month.”

Break bad habits: Resist impulse buying

“We’re wired for instant gratification,” says Ulzheimer. “But if you can’t afford to pay cash and whip out a credit card without thinking, then you’re on a downward spiral into debt and money mismanagement.”

Using credit cards to spend more than the cash you have while making only the minimum payments on the cards can build up their balances faster than you can pay them, he says. And if you pay late, penalty fees just add to the total. “You forgo the many benefits of the proper use of plastic, such as for reimbursable business traveling, establishing a good debt utilization percentage on your credit report… and for earning easy cash-back rewards,” says Ulzheimer.

Practice telling yourself “no” when tempted to spend, and try these tactics.

• Distract yourself by making a phone call or unwrapping a stick of gum until the “buy” urge passes.

• Make a rule to only charge for reimbursable business expenses or rewards and only when you have the cash to pay for it during the grace period before the date interest is charged. Double-check dates.

• If you must take drastic measures to curb spending, have your credit card company lower your limit and opt out of over-limit and overdraft spending so your card gets declined.

Break bad habits: Automate finances

Counting on willpower alone is not enough. “When you rely on willpower to meet your expenses, important financial obligations such as timely payments and depositing to an emergency cash or retirement fund are left up to your personal choice and can easily be mismanaged,” says David Bach, author of “The Automatic Millionaire.”

Ulzheimer warns that some use the excuse of not being organized or not having enough money, but paying late just means you pay more because many companies tack on a late fee (typically $39) and many also charge you interest on the unpaid balance as well.

Says Bach: “Make your important payments automatic so bills get paid on time, and important savings deposits that protect you and your family don’t get missed.”

Make payments automatic to avoid late fees.

• Set up shadow payment dates by subtracting seven days from the real due date.

• Make payments automatic using your bank’s or the payee’s online bill pay.

Break bad habits: Pay more than the minimum

Paying just the minimum is a good way to stretch out your debts for as long as you can. “When you only pay the minimum amount due on a credit card, you’re effectively rolling over approximately 97 percent of the balance and adding the interest applied,” says Ulzheimer. This is very profitable for mortgage companies and card issuers, but not you. “The only way to reduce your balance quickly is to pay more than the minimum, avoid fees and stop adding to balances,” advises Ulzheimer.

Pay more than the minimum with every payment.

• Set up automatic timely payments of a higher amount than the minimum.

• For fastest results, create a “debt snowball,” in which you pay as much as you can toward the lowest-balance card until it is paid off. Then you apply that same payment amount plus the new payment amount to the card with the next-smallest balance.
• Consider taking advantage of the automatic biweekly mortgage payment plan your lender may offer. For the one-time fee, the quicker pay-down is worth many thousands of dollars over the life of the loan.

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