12/09/2014 11:52 pm ET Updated Feb 08, 2015

Can Bad Financial Habits Be Unlearned?

Some readers of last week's column recognized themselves in my description of a "NOHO": someone not cut out to be a homeowner. NOHOs live paycheck to paycheck, price substantial purchases in terms of the monthly financing charge, and typically have no reserve for meeting unexpected contingencies. Some readers asked me how to change this pattern, and I decided to take a stab at it in this article. While I have no professional credentials as a psychologist, I have had some experience in converting bad habits into good ones.

My bad habit of many years standing was eating late at night before I went to bed. It was bad for my weight, my digestive system, and ultimately my health and life span. I knew all that, yet the prospect of a slimmer body, better health and longer life span did not motivate me to change my eating habits. The benefits of those desirable goals were just too far away.

I broke the habit by changing my breakfast, from toast and coffee to a substantial meal that I plan the night before. When I become hungry at night, planning and visualizing my forthcoming breakfast allows me to resist the impulse to eat then and there.

We develop bad habits because of the gratifications they provide. In my experience, converting a bad habit into a good one and making it stick requires a new gratification associated with the good habit. But the new gratification won't necessarily do the job if it doesn't materialize for a long time. The longer is the delay, the greater is the need for a reinforcement mechanism that allows the gratifications to be anticipated. My new gratification was the great breakfasts that replaced my usual toast and coffee. My reinforcement mechanism was planning the breakfast each day.

In the case of NOHOs seeking to change bad financial habits, the challenge is greater because the gratifications associated with good financial habits are much delayed. The reinforcement mechanism becomes critically important.

One mechanism that I have seen numerous people use successfully is a disciplined household budgetary system in which income that won't be needed for daily recurring living expenses is allocated between multiple accounts at the time it is received. Each account represents a planned future fund use, such as the acquisition of a TV set, Car or House, a College Fund, Travel Fund, Retirement Fund, Whatever. The amount allocated will vary with the fund plan. For Car and House plans, for example, it probably would be the amount needed for a down payment, but for appliances it would cover the entire price. Once the money goes into the account, it does not come out until it is time to execute the activity for which the fund was created.

The allocation of funds at the beginning rather than at the end of the pay period is critically important. Waiting to see what is left at the end of the period is a guarantee of failure.

The gratifications begin with the first allocation of funds, which can be months or even year away. Those who need psychic reinforcement in the meantime can use a variety of stratagems, such as tacking the status of their funds on a conveniently viewable bulletin board.

Some of the gratifications from good financial practices may come as a pleasant surprise, such as the discovery that the market rewards those who can pay without borrowing. Consider the ex-NOHO purchasing a TV set who, instead of paying $150 a month for 10 months, puts the $150 in a TV account and waits out the 10 months. At that point, the ex-NOHO may find that the cash price is only $1250 rather than $1500.

The NOHO's gratification was in having the set right away, The ex-NOHO has the gratification of paying less, but the big payoff is yet to come. It is a life style that eventually may lead to homeownership, college education for the children, and eventually to a secure retirement.

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