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5 financial cleanses to break bad money habits

By Dana Dratch

Have a toxic relationship with money? The answer might be a financial cleanse. 

If you have bad money habits you want broken, try a monetary version of the popular nutritional detoxification program and go hard-core on an aspect of your financial life that you want to change. Then, after two or three months, with bad habits broken, you can incorporate a more moderate approach to maintain that new, healthy attitude toward your finances.

Here are five challenges aimed at helping you readjust your approach to the green stuff. Also included are steps to incorporate your newfound healthy habits long-term.

Sample them all, or select just the ones that will help you most: 

Have a toxic relationship with money? The answer might be a financial cleanse. 

If you have bad money habits you want broken, try a monetary version of the popular nutritional detoxification program and go hard-core on an aspect of your financial life that you want to change. Then, after two or three months, with bad habits broken, you can incorporate a more moderate approach to maintain that new, healthy attitude toward your finances.

Here are five challenges aimed at helping you readjust your approach to the green stuff.  Also included are steps to incorporate your newfound healthy habits long-term.

Sample them all, or select just the ones that will help you most: 

Cleanse No. 1: Take spending off automatic
Automated bill-paying is a great feature, especially if you travel or tend to forget to make payments. But when money comes in automatically and goes out the same way, it's easy to get disconnected from your finances, says James E. Burroughs, a University of Virginia commerce professor who specializes in consumer behavior.

To get down to the basics, you have to understand where your money is going, he says. 

Take things off of autopilot for a few months and really read the bills and statements. Are you being hit with convenience or penalty fees? Are there charges that you didn't authorize? Are you now paying for services that were free when you signed up? Are you paying for services you're not using?

You also want to track your spending. "Ideally, you should be logging every expense you have in some way," says Burroughs. "Then periodically go through and look at those expenses and cross-check against your bank statements to make sure things are proper." 

"It really gives you a sense of empowerment that you are in control," he says.

App, computer software or old-fashioned paper? "There is no right way," says Burroughs. The important thing is "that you do it." 

Once you've tracked your spending, you can create a budget, he says. What does it cost you to live every month without reaching for the credit cards? What expenses are ripe for cutting?

With a budget, "once people find success, it becomes reinforcing," he says. "You are in control of your finances." 

Post-cleanse: Think about automating some of the bills if that makes your life easier, as long as you keep an eye on statements. But if certain bills tend to creep higher while on autopilot, or if automation make it difficult to track spending or get refunds for billing errors, keep paying  those manually.

And keep the budget. 

Cleanse No. 2: Shelve the credit cards
If you've been fighting a losing battle against balance creep, or you're often afraid to open that statement at the end of the month, take the cards out of your wallet and put them away (in a safe place) for a few months, says Dave Jones, president of the Association of Independent Consumer Credit Counseling Agencies.

Here's why: The brain registers parting with cash as a "loss." You instinctively realize you're trading one thing (money) for something else (goods or services), says Douglas E. Hough, associate scientist with the Johns Hopkins Bloomberg School of Public Health. 

That doesn't happen when you hand over a card, and the clerk hands it right back to you, he says.

Repeated studies find that, when we pay with plastic, we spend more, says Kit Yarrow, consumer psychologist and author of "Decoding the New Consumer Mind." "Credit cards put a buffer between people and their money," she says.

The solution: "Go cash-only for three months," says Jones. "That is going to be very tough for a lot of people, no doubt about that. It's drastic, but it will also save some people a lot of money," he says. 

It's also a good way to train yourself to curb spending, says Jones.

FYI: It's an urban myth that you have to carry a credit card balance to maintain a good credit score. With most cards, you do want to use them every three months or so just to keep the accounts active. But pay that balance in full if you want your best score. 

Post-cleanse: When you put the cards back in your wallet, limit charging to what you can pay off that month, says Jones. That will mean eliminating outstanding balances and tracking spending throughout the month, he says.

Once you pinpoint places where you tend to overspend with plastic, such as the grocery store or the big-box electronics place, that's where you keep using cash only, says Yarrow. 

Cleanse No. 3: Eliminate fees
For the next three months, cut those nasty surcharges from your life, says Ruth Susswein, the deputy director of national priorities for Consumer Action. 

That might mean opening a checking account at an institution that doesn't levy ATM fees or one that has more ATMs, so that you aren't charged out-of-network fees. Or setting up direct deposit to qualify for free checking.

It could mean juggling bills (or redirecting money), so you don't get hit with late fees. It might even require putting credit cards on ice until you pay down balances. 

Your goal: Go fee-free and see just how much you save.

Post-cleanse: You're no longer paying invisible fees automatically, so you decide when and if that extra fee is worth the expense. 

Cleanse No. 4: Automate savings
You know how much you should be able to save every month. But when you reach for that money, it's never there. So have that amount automatically transferred to savings as soon as your paycheck hits your account, says Susswein. 

That way, you can use it to pay off debt, save for a big purchase or build your emergency fund, she says.

In some cases, an employer may offer the service for you, in others, you may have to set up an automatic transfer every month with your bank, she says. 

The idea: You can't spend it because "you never see it," Susswein says. "I think that this automatic deposit idea can make this happen as painlessly as possible."

One strategy: "Deposit 10 percent of salary in savings," and force yourself to live on what's left, says Kathleen Gurney, author of "Your Money Personality: What It Is and How You Can Profit From It."

While this one can be painful, it's temporary "and transforms into a sense of empowerment and control," she says. 

Post-cleanse: You've paid off that card debt or stockpiled money for a new car or vacation, now what?

"Instead of going back to your old ways, see if you can take that same amount and put it into an emergency fund," says Susswein. "Because you may need that." 

Cleanse No. 5: Cut back to 'needs,' skip 'wants'
Running out of money before the end of the month? Have enough for basics, but can't seem to put cash together for bigger goals, such as savings, vacations or retirement?

Start keeping a log of where you're spending your money, says Jones. Chances are you'll see "wants" masquerading as "needs." $10 lunches? $100-a-month premium TV? Phone plans with all the extras?

Would the world stop turning if you cut back to free television, a basic phone plan or a bagged lunch? How much could you save?

"People get into habits," says Jones. So switch it up for a couple of months. Spend on the needs, skip the wants. Scrutinize bills you pay without thinking (such as  phone or TV service).

Post-cleanse: "In neurology, our brains set new patterns after about two months," says Yarrow. After that, carefully reintegrate the things you truly missed, on a more limited basis, she says. You'll appreciate them "10 times more."

See related: Author finds $1,000 trimmable expenses in his family budget

Published: February 5, 2014



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