14 ways to build better money habits today

We’re more likely to buy something if we’re paying with a plastic card than if we’re paying with cash, says a 2012 study in the Journal of Consumer Research. That’s because handing over cash gives us a painful emotional jolt, while paying with plastic is just too comfortable, according to a study in the Journal of Experimental Psychology.

Paying with credit cards is associated with less healthy food choices. A 2011 study of shopping behavior found that shoppers using credit or debit cards picked up more food items that were considered unhealthy. When we encounter cookies, cakes, and pies—and when we’re paying with a card—we’re more likely to fall victim to our impulses (Journal of Consumer Research).

When you do need to use plastic, set up transaction notifications on your budgeting app (such as Mint) so that you’ll be alerted when you’ve reached or exceeded your budget. This could help you be more realistic about your spending.

Credit cards involve passive, behind-the-scenes transactions. They make spending too comfortable and going into debt too easy. Consumers using cards are more focused on the benefits of the product than on the cost, according to a study in the Journal of Consumer Research.

Passive transactions can work for you if you use them to avoid debt and save money. For example, when you automatically pay off your credit card every month, you’re building your credit score while avoiding racking up interest charges.

Speaking of, remember that every time you use your credit card, you’re taking out a high-interest loan. “A major problem is that some consumers underestimate the total costs of piecemeal borrowing. Apparently people who would never take out a big loan are willing to take out a number of small loans that are big in the aggregate,” writes Dr. Cass Sunstein, a leading behavioral researcher (in New Republic). “One survey found that small purchases of non-essential goods (including movies and DVDs) are a major contributor to credit card debt. Financial distress, including consumer bankruptcies, is a possible consequence.”

Paying bills automatically can help protect us from overdue charges and bad credit. The downside: Automatic payments are another example of passive transactions, and these have risks. When we pay bills automatically, we’re not watching our spending or looking around for better options.

For example, in a 2007 study published by the National Bureau of Economic Research, states with electronic toll collection systems raised rates more than states that didn’t. It was relatively easy for electronic-tolling states to hike up their charges because consumers were less conscious of the cost than they would have been if they were handing over quarters and bills every time they took the highway.

Often, overdrafts are the result of small transactions. Overdrawing makes these transactions far more expensive. “About 11 percent of [young adults] overdraft more than 10 times a year, and these overdrafts were typically for small purchases under $24 and were paid back within three days. With the median overdraft fee equaling $34, borrowing $24 for three days is like taking out a loan with a 17,000 percent annual percentage rate,” says Time.com.

If you’re paying $2.95 to withdraw cash, two withdrawals a week are costing you more than $300 a year. It’s time to get yourself to a free ATM. If you pay for everyday expenses using a debit card (which is risky, as we’ve seen), take advantage of cash back—no charges there.

Ordering a pad Thai on Uber Eats is a non-cash transaction. And we know what happens with non-cash transactions: They make it way too easy to spend money. Instead, try making your own takeout-style Thai food.

Our behavior is powerfully influenced by our environment. Without the in-your-face temptation of these services, it’s easier to save that service for when you really need it.

We ❤ “free,” but we can’t handle it. Research shows that the word “free” can wildly distort our thinking and choices. This makes “free” a great opportunity for retailers.

“For some reason, the word ‘free’ seems to scramble our brains,” writes Jeff Rose, CFA and author, on his website Good Financial Cents. “We forget what other costs there might be to that item or service because we are so focused on the fact that we’re not paying money. What’s really interesting is that we are willing to pay more in order to get something free.”

Free product trials capitalize on loss aversion. For example, video streaming services know you’ll be more willing to pay to keep your account going after your 30-day free trial than you are to just buy it outright.

Free samples—even those tiny servings of prepped food in grocery stores—invoke our sense of reciprocity. They change consumers’ purchasing behavior and boost product sales, according to a 2011 study in the British Food Journal.

“The biggest challenge to budgeting is the idea that because students have limited resources, they don’t need to take steps to take control of their finances. They do,” says Bryan Ashton, BSBA, assistant director of the Student Life Student Wellness Center at The Ohio State University.

This principle starts now and applies throughout your life. “Pay attention to the little things,” says Dr. David Just, a professor of behavioral economics at Cornell University. “Reevaluate the decisions you’re making day to day with your money” (quoted on CreditCards.com).

Apps and websites students recommend include Mint, AllBudget2, bank and credit union apps, LearnVest.com, CreditKarma.com, and YNAB [You Need a Budget].

Being exposed to sticker prices has a powerful effect on what we are willing to spend. Psychologists call this the anchoring bias. Say you’re planning to spend $35 on a pair of jeans. In the store, you see jeans priced up to $150. You end up buying a pair for $50. You’ve spent significantly more than you intended, but your new jeans seem like a bargain compared to the $150 brand.

In other words, we think about money in relative terms, not absolute terms. That’s why we go to some effort to cut $15 from our grocery bill but don’t hesitate to pick a $225 vacation rental over the $210 option.

To some extent, you can offset this bias. “In order to combat the effect of anchoring, it’s important to put your own anchor to the amount of money you would otherwise spend,” writes Birken. The Ramen trick (above) is an example of self-anchoring.

Another anchor to consider: “Between your graduation and your retirement, if you save $10 a day and invest it in the stock market, when you retire you will likely have $1 million from those savings alone,” says Larry Pike, CFA, a financial planner in Massachusetts.

When you show your progress to your coach or ally, you know that they will know if you slip. “This way you have a built-in motivator who will make you think twice before you go off the plan,” says Dr. Hersh Shefrin, professor of finance at Santa Clara University’s Leavey School of Business, California (LearnVest).

“The most important step is to understand where your money really is going. If you can’t get a handle on your spending, it will be difficult to take control and make changes,” says Pike.

Intellectually, you know that good budgeting habits will work for you in the long run, but research shows that immediate rewards are more motivating. Use that. Follow your budget review with a Netflix movie or a DIY mani-pedi, or work a self-bribe into that budget as you go.

Also: Block out the time on your calendar. This is also key to getting things done. Studies prove it.

Humans evolved for day-by-day survival. Even as we live until 75 or 80, our instincts remain stuck in the short term.

Be realistic. Optimism is a delightful personality trait, but it makes us less likely to put funds aside to deal with future setbacks—even though we’re all bound to experience setbacks sometimes. Optimism is a strong human bias and it leaves us financially vulnerable, say behavioral economists.

Save money by eliminating the temptation to overspend, writes Dr. Dan Ariely, a leading behavioral economist based at Duke University, on his blog. When you get into the workplace, start your retirement planning: “401(k) plans take the money right out of our salaries, forcing us to manage with the leftovers.” Similarly, “The key to growing your money turns out to be putting it in a decent fund and forgetting about it. A Fidelity Investments study showed that the best long-term savers are people who forgot that they had a savings account.”

Do you receive an irregular lump sum to cover your living expenses? Each month, automatically transfer the appropriate amount from your savings account into your checking account. This way, an irregular sum functions like a regular paycheck, so you won’t spend money that you’ll need for future expenses. This counters the short-term “spend now” instinct.

How we handle money depends on where it came from. We spend inheritances or gifts differently from earned income. Those financial windfalls don’t feel like real money, so we splurge or take risks—and then we regret it. This is because we tend to value items according to how much labor we think went into them.

People with multiple loans tend to underestimate the total cost of their loans and make misguided decisions about repaying them, research shows.

Typically, we are driven to pick one of our loans and pay it off (it feels good to go from three loans to two). This bias is known as debt account aversion. It would be more rational to look at the total amount we owe across all our loans and pay off the highest-interest loan first.

We can somewhat offset this bias by looking retrospectively at how much interest has built up on each loan or credit account over time, since that helps us focus on the real costs, according to a study in the Journal of Marketing Research.

In the same study, consolidating debts helped consumers manage their money more effectively.