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By Carrie Schwab Pomerantz

If you’re like most people, you probably believe that when it comes to your financial decisions, you carefully weigh the pros and cons to make the right choice. But according to Dan Ariely, professor of behavioral economics at Duke University and author of the new book, “Predictably Irrational: The Hidden Forces That Shape Our Decisions,” you might be surprised at what truly affects how you spend your money.

I recently had an interesting conversation with Ariely, trying to better understand the common behavioral traps that may sabotage our long-term best interests. We can all most likely relate to the fact that it’s much easier to spend money when we use a credit card rather than cold, hard cash. Or let’s say you’re shopping and see a pair of shoes you like (but don’t really need) for $200. Then you find a similar pair for $75. By comparison, the $75 shoes seem like a bargain; therefore, you buy them and congratulate yourself for saving money.

So what’s the solution? According to Ariely, all is not lost. With a little introspection and some planning, we can forge a smarter path, often by looking no further than our habits — the myriad of small choices we make every day without even really thinking about them. Of course, habits can be good or bad, but they’re powerful forces that can affect every aspect of our lives — from the trivial to the profound. The key is to get the habits to work in our favor.

Here are some practical ideas to help you get started:


This may seem obvious, but a good place to start is by asking yourself whether you are spending your money while keeping with your values. If you enjoy adventure and the most exciting place you’ve traveled in the last two years is the supermarket, then you may need to reevaluate how you’re spending your money. If you feel being financially secure and debt-free are important, yet every month you charge another $2,500 of nonessential items to your credit cards, that’s also a disconnect. Without the perspective that your priorities provide, money is likely to slip through your fingers like water through a sieve, getting you no closer to your ultimate goals.


When you’re in the habit of spending, one of the hardest elements is deciding what you can cut in order to save. To help make it easier, Ariely recommends that we experiment a bit. Instead of arbitrarily saying you won’t go out to dinner anymore, try it for a month or only go out once a week. How does that feel? The next month try another cutback, such as changing your cable TV service from gold to silver. Which extras (dinner out or gold cable) make you happier?

You might also attempt creating a long-term plan; come up with 10 ways to reduce spending over the course of a year. Try five of them and see which one you can continue pursuing. Keep experimenting until you find the cutback — the one you can turn into a good savings habit. A word to the wise: Don’t get frustrated if one idea doesn’t pan out. You know the old adage, “If at first you don’t succeed … ?”


Saving is a lot easier if you have a specific goal, one that is concrete and evokes an emotion. Retirement is, of course, an important long-term objective, but it is hard to save for because the concept of retirement remains abstract in most people’s minds.

Does saving an extra $100,000 mean a golf membership or elaborate vacations? Make it real. As you imagine that cabin in the mountains, you’ll be more likely to set aside the money.

Attempt setting up some shorter-term goals: a vacation, a fund for health-care emergencies or your kids’ education. If you know what you’re receiving as well as what you’re giving up, you’ll be more motivated to keep saving. You could even open multiple accounts, each for a specific savings goal, and make it a custom to deposit a set amount every month in each account.


Most of us observe our spending after the fact; however, to really change our spending habits, we have to think ahead. For instance:

— Create a budget up front and stick with it. You might want to take a cue from the ’50s housewives who had envelopes with a specific monthly amount of money for items like groceries, clothing and entertainment. That way, when the money for the month is gone, you’ll be forced to consider how it was spent. If there’s some remaining, you’ll know where you can save.

— Make spending comparisons. Is your money better used on a home improvement or a special trip? Make the comparison not so much about the money, but about the result you could obtain with the same amount of currency. Another good comparison is time versus money. Think about what you make per hour. Is the possible expense really worth the amount of time it would take you to earn the money?

— Put the brakes on your credit card. It’s not only easier to spend more with a credit card, but if you’re carrying a balance, every purchase is costing you even more in interest and possible late fees.

— Set up a support system. Don’t be afraid to talk about your money concerns. Share your ideas and find out what other people are doing to establish good habits. You might even consider a “buddy system” with a friend in which you review your mutual expenditures at the end of the month as well as help each other find creative ways to cut spending.


Many times there is separation between what we know we should do and how we actually behave. To bridge the gap and reinforce our good routines, make managing finances more automatic.

Review your own situation:

— Your 401(k) or other employer-sponsored retirement plan? It’s one of the best retirement savings habits you can develop.

— Direct deposit from your paycheck or checking account into your savings account? There’s really no easier way to keep saving.

— Online transfers between banks? If you don’t have to write a check or make a special trip, you’re more likely to move the money from your checking to your savings or brokerage account.

— Automatic bill pay? Your bills will be paid on time and you’ll avoid late fees.

— An automatic investment plan? Although it does not protect against loss in declining markets, this can help keep your savings growing and takes advantage of dollar-cost averaging.

These types of services are easy to set up online; many banks and brokerages offer them at no cost.


Bottom line? When it comes to making and breaking habits, we’re often our own worst enemies. The first step is to take a good look at yourself. What’s your worst financial habit? I have a friend who confesses that her financial future would be sturdier if she could only stay out of high-end department stores.

Start at a weakness. You don’t need to fix everything at once. But once you begin, you may find that one good savings practice leads to another: one step at a time.

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