I Resolve to: Save More, Cut Up My Credit Cards, Put More Money in My 401(k), Buy Low, Sell High, Make a Household Budget, Pay Down My Debt, Shop Smarter, Try and Try Again
By David Futrelle

(MONEY Magazine) – It's a strange and seemingly pointless ritual that we put ourselves through every year. On the first day of January, in the cold light of, er, noon, we nurse hangovers real and figurative, trying to conjure interest in flower-covered floats and vowing to set everything right: Burn off that Christmas fat at the gym, give up carbs and cigs, cut up the credit cards, save more for the future. Yet 70% of us eventually break our New Year's resolutions. Those gym cards sink deeper into our wallets, and we soon find ourselves nibbling potato chips and paying bare minimums on maxed-out MasterCards. As for putting more money into our IRAs and 401(k)s...uh, where's that other bag of potato chips?

Does this mean our resolutions are a waste of time? Counterproductive, even? Not at all. Most of us have things about our lives we dearly want to change; we just can't quite figure out how to pull it off. If you've been struggling to save more or pay down debt or just get a firmer grip on your finances, help is at hand. A growing number of psychologists and economists have been studying how and why our resolutions fail—and what it takes to succeed. By understanding what it is inside us that trips us up when we set about trying to change, we can learn to make resolutions that stick. And we can make use of the wonders of automatic payroll and bank deductions to give us the extra bit of discipline we need.

So how do you make your resolutions last longer than leftover eggnog?

Get serious

The reason most of us don't stick with our goals is that, in the end, we don't really want to make big or painful changes. Sure, actually going to the trouble of making a resolution is a step in the right direction. According to University of Scranton psychologist John Norcross, those who make resolutions are 10 times more likely to alter their lives than those who don't (even if the nonresolvers also want to change). If nothing else, resolutions focus the mind. Yet to succeed they must be smart, specific and serious. Coming up with a few half-baked vows in a burst of optimism (or in a self-flagellating funk) on New Year's Eve is a recipe for failure. Most of us know this in our hearts, but now it's official: A recent survey by researchers at the University of Washington reveals that the resolutions most likely to fail are those we make between Dec. 28 and Jan. 1. Sound familiar?

The first step is to convince yourself that you really need to make a change. If you're reading this article, chances are there's something about your financial life that you know you need to adjust. For many Americans, the great albatross is the plastic in our wallets. The typical U.S. household carries $9,200 in credit-card debt, according to CardWeb.com, shelling out $1,100 a year in interest and fees. Carefully read your latest card statement to assess the self-damage. If that's not horrifying enough, try this painful experiment: Figure out what you're paying in interest per week, then take an equivalent amount of cash from your wallet and literally flush the bills down the toilet. (If you prefer a more positive approach, consider this: The $1,100 a year you're paying Visa could buy you a wide-screen projection TV.)

The point isn't to flog yourself for getting into debt in the first place—we all have our reasons, some good, some bad—it's to motivate yourself to change things. Reminder: Every step you take today to get your finances in order is a gift to your future self. You may recall Jerry Seinfeld's classic riff on the eternal internal struggle between "Night Guy," who likes staying out late, and "Morning Guy," who must deal with the inevitable hangover. In essence, this is the battle we all face—our present-day selves robbing and mistreating our future selves, who'll have to mend our mistakes and pay our debts.

The best way to master our tendency toward "hyperbolic discounting" (that's the economists' fancy-pants term for our inclination to spend every penny we've got, and then some, right now) is to remind ourselves that each dollar we don't spend today can be worth more than a dollar to our future selves. If you're paying 15% on your credit cards, cutting your debt is the equivalent of earning a 15% rate of return. Meanwhile, every dollar you put in the market today will be worth two bucks after inflation 20 years from now, assuming a very modest market return of 4%.

Be practical

Instead of making vague and daunting pledges to recast your entire life, set smaller goals you know you can reach—and reward yourself modestly when you meet them. Then you can up the ante and introduce a more ambitious goal. Even partial success can be progress: Maybe you can't cut your clothes spending by 10%, but it's likely you can cut it by 5%. That electronic gizmo you've been ogling? It need not be off-limits forever, but every month you wait, the cheaper it's going to get. (That's technology for you.) Concentrate more on tempering your habits than on reaching an arbitrary goal. That will do you far more good in the long run.

Be forgiving

Many less resolute resolvers surrender the first time they slip, assuming their temporary loss of discipline suggests that they're too weak-willed to bother trying. That's a mistake. Norcross discovered that the people who ultimately succeeded in keeping their resolutions stumbled as often as the rest of us in the first few weeks—they just stuck with it anyway. Most people typically make and break a resolution as many as five times before they pull it off, he finds. Remember that the road to virtually every success in life is littered with failed experiments. Thomas Edison spent more than a year trying every filament he could think of before he found one (carbonized sewing thread) that burned long enough to make the incandescent bulb practical. Paying off your credit cards may not be as momentous as inventing the lightbulb, but it's still something worth toiling for.

James Prochaska, a psychology professor at the University of Rhode Island and co-author, with Norcross and Carlo DiClemente, of Changing for Good, notes that keeping a resolution is a lot like learning a new skill: It takes time to master. And if you don't succeed this year, try, try again next year and the year after. Meet the new year's resolutions, same as the old year's resolutions.

Meanwhile, don't undermine your resolve by overanalyzing your failures. When we make resolutions, we are, in effect, trying to supplant old attitudes ("Shopping always makes me happy") with new ones ("It's not worth going broke to slake my shoe addiction"). Trouble is, even if we embrace the new religion with fervor, that old stinkin' thinkin' lingers in our unconscious, tripping us like an untied shoelace. University of Virginia psychology professor Timothy Wilson says the best way to break the hold of the old is to change our behavior first. Instead of nagging yourself to think virtuous thoughts, change what you do—and your mind should follow. When you're tempted to hit the mall on your way home from work, for instance, stop off at the library instead.

Dwelling endlessly on disappointments can sap your resolve. Norcross says that those who want to keep their resolutions shouldn't try to evaluate their success too early, lest the evidence of failure suggest the effort isn't worth making in the first place. Better not to think about it until your new habit actually becomes habitual.

Commit yourself

The best way to save more money or shrink debt as painlessly as possible? Make your new frugality automatic—and invisible. The greatest feature of the 401(k) may be the simple fact that you can have your contribution automatically deducted every month. Were you to try to set aside a portion of your paycheck every month on your own, you'd probably find it hard to do because you'd feel the sting of the loss. That's one of the main reasons 401(k)s have been so much more successful than IRAs in encouraging savings: With automatic deductions, you don't see the money in the first place, so you don't miss it as much. (A small flotilla of studies in the field of behavioral finance shows that most people feel losses far more acutely than gains; that's one reason it's so hard to give things up.)

Outside of 401(k)s, however, it can be a challenge to outsource our financial self-discipline. So some turn to pay-as-you-go charge cards and Christmas clubs as makeshift "commitment devices," as the economists call this sort of thing. Others use Uncle Sam as a financial disciplinarian, setting themselves up for big tax refunds every year. In essence, this means they're loaning their own money to the government at 0% interest, which makes little sense—until you realize they're using withholding as a commitment device, a way to easily, automatically and invisibly stash away a hefty chunk of cash out of the reach of their own greedy hands. When the inevitable refund arrives, it seems like pennies from heaven. Classical economic theory deems this sort of behavior to be deeply irrational. But in the real world, for some people, it works. You can do much better, though, by adjusting your withholding and automatically depositing that extra cash in a mutual fund or even a simple savings account—and declaring it sacred money you aren't allowed to touch.

Unfortunately, many of us also turn to a far more expensive kind of commitment device: credit cards. How's that? Turns out, most people with hefty credit-card balances also tend to have a decent amount of money in the bank, meaning they're paying through the nose to borrow money they don't actually need. What explains this strange behavior? A provocative study by Carol C. Bertaut of the Federal Reserve and Michael Haliassos of the University of Cyprus suggests that many people may be using credit limits as a crude way to keep spending in check. Essentially, the two argue, our "accountant selves" try to restrain our "shopper selves" by keeping our card balances close to the limit and saving what money we can in our bank accounts. It's an awfully pricey way to keep that inner shopper in line. But if it's the only thing that works for you, consider paying off what you can on your cards—and asking to have your credit limit lowered.

Luckily, there are more sensible ways to impose self-discipline. Consider the slyly innovative 401(k) savings booster that made finance professors Shlomo Benartzi and Richard Thaler one of MONEY's 2004 Class Acts (see page 75): Under their Save More Tomorrow program, employees agree to set aside a portion of future salary increases to put toward retirement savings. At one company, about 80% of workers signed on (and 80% of them stuck with it) and the average savings rate rose from 3.5% to 13.6% in less than four years. It works in part due to what's called the "money illusion." Since you're committing only a portion of your raise to your 401(k), the dollar amount on your paycheck actually goes up even though you're saving more. In fact, because inflation swallows most of your raise, you may have less buying power but you likely won't feel much pain. You can institute your own version of this illusion by upping your contributions to your 401(k) on your own, and to post-tax savings vehicles after that, each time you get a raise.

Don't kid yourself

Changing deeply-rooted financial habits, even obviously dysfunctional ones, is hard work. As Woody Allen once observed, it's "easier to spend two dollars than to save one." (He also noted that "money is better than poverty, if only for financial reasons," which is even harder to argue with.) Why do the dollars slip so easily through our fingers? While saving is all about providing for ourselves in the future, it feels, right now, like deprivation. Very few of us love money in the way that, say, Scrooge McDuck loves money—something to hoard in vaults and roll around in from time to time. No, most of us love money because of what it can do for us. Money, the philosopher Arthur Schopenhauer once wrote, is like "an unwearied Proteus...always ready to turn itself into whatever object [our] wandering wishes or manifold desires may for the moment fix upon." Alas, instead of satisfying our desires, money all too often inflames them further. Somehow we feel more safe and serene surrounded by these things than we would if we had that money in the bank. To say that's irrational is to state the obvious, but that doesn't make it any easier to overcome.

Spending money, even going into serious debt, can also reflect an all-American optimism about our prospects: Surely in the future we'll make enough to pay off the debts we incur today. It's not an altogether unreasonable hope. No doubt you've noticed that the excessively frugal tend to be sour, tiresome pessimists.

Of course, there's optimism and there's optimism. Taking our debts and investments seriously today means reining in fantasies of fabulous, effortless wealth. But that doesn't mean we must live like misers. If you try to cut the things that bring a ray of consumerist sunshine to your day, you may well end up feeling cheated out of life—and be much more likely to backslide. Sure, you must train yourself to think twice before you buy, but you should also think twice about what you give up.

The real trick is to figure out ways to deprive yourself without feeling, well, deprived. It's quite doable. Most of us, after all, have trained our inner Night Guy to behave with restraint much of the time, skipping that nightcap and getting to bed at a reasonable hour. Except, perhaps, on New Year's Eve, which is probably why our New Year's Morning Guy is so busy thinking up resolutions in the first place. Avoid giving yourself the mother of all hangovers—a financial one. To thy future self be true.