Why is changing our behavior so difficult? Why do we get stuck in a rut so often? Why can’t we focus our finances on the best way to reduce debt instead of racking up more of it? How do we refocus not just our goals but our actions to build wealth? Recently, I’ve had the opportunity to delve into a couple of terrific psychology books, and I’d like to offer a few insights I’ve gleaned from them.

The first, Why Smart People Make Big Money Mistakes and How to Correct Them, by Gary Belsky and Thomas Gilovich, focuses on research in behavioral finance. The book provides some fascinating insight into why our financial behaviors don’t always make sense – and what we can do about it.

3 Insights to Help You Get Out of Debt

Insight #1: It’s all in your head…and that’s the problem.

One of the big dangers to wealth building is something called “mental accounting.” It describes how we allocate our money in our mind and how that translates into (often irrational) behavior. Mental accounting explains why we will handle a bonus or windfall differently than a pay raise, and especially why we treat plastic money (credit cards and debit cards) differently than cash, or money from a paycheck. (In case you haven’t heard, the research shows that generally consumers spend more when they pay with plastic, as compared to cash.)

Belsky and Gilovich use the example of income tax refunds to illustrate how mental accounting works. While receiving a big tax refund once in awhile might be a fluke, receiving a large refund year after year is ridiculous. “Why lend the government your money for free?” ask financial advisors every April. But that’s because those who do get a tax refund often enjoy it as if it were “found money” and spent it as a windfall, instead as the deferral of salary that it really is. If we were to correctly adjust our withholding, for example, we would probably use the money from our larger paychecks more carefully, and be less likely to splurge on whatever it is we decide we really “need” when that big refund check arrives. They even describe one study where recipients of a relatively small amount of unexpected cash spent twice as much as they received.

In Why Smart People Make Big Money Mistakes, the authors warn: “Mental accounting helps to explain one of the great puzzles of personal finance – why people who don’t see themselves as reckless spenders can’t seem to save enough. The devil, as they say, is in the details….Being cost-conscious when making little purchases is where you can often rack up big savings.”

The pendulum can swing the other way, too. With mental accounting, investors can become too conservative with their money and fail to take the appropriate level of risk.

Strategy: Write down every dollar you spend, large and small, for a month. Recording purchases as soon as you make them will keep your list accurate. Remember, you are trying to get away from the bias of mental accounting. At the end of the month, add up your spending in each category, and look for places where you make changes.

An alternative: Cash your paycheck in small bills and use envelopes to hold the cash for each expense category. When the money is gone for the month, you stop spending in that category.

Also smart: The authors also suggest another strategy: Wait. Park a windfall, tax refund, or other unexpected cash in a bank account for three to six months. After that time has passed, you are more likely to see the balance as savings, rather than extra money to spend on a whim.

Insight #2: Inaction Can Be Costly

That insight from the chapter titled “The Devil That You Know,” isn’t news to me. After all, on many occasions I have talked to someone in a financial bind and offered my advice, only to find that they are back six month later, having taken no action and finding themselves in a worse situation than the first time we talked. But the research behind the phenomenon of “decision paralysis” was interesting. Belsky and Gilovich attribute it to a number of factors, including the fear of regretting our choices and a comfort level with the status quo (even when our current situation isn’t so hot).

Another reason for decision paralysis, however, is the myriad choices we have today. Need help getting out of debt? There are probably at least 2,500 different firms offering solutions. Need a mortgage? Well, there is the decision of what type of mortgage: interest-only, 2/28 ARM, 30-year fixed, or a hundred other varieties. Then there is also the decision of who to get the mortgage through: your local bank, a mortgage broker, an online company. Is it any wonder we are overwhelmed? The research shows that more choices are not necessarily good, and can lead to inaction. I’ve been there many times, and chances are, so have you.

Strategy: Acknowledge the cost of inaction. Start investing and you may lose money. But don’t invest and I guarantee you won’t have anything. In other words, just because you can’t do everything you want to do financially doesn’t mean you can’t do anything at all. Starting a $5 per week investment account or adding an extra $5 a week to paying down your debt is better than nothing.

Also smart: Identify the experts and get their advice. Sometimes it is hard to see your situation clearly when you are bogged down in it. An objective voice from someone who understands the options can be helpful, especially if you act upon it. You’ve come to a great place to start.

Insight #3: Small Changes Can Make a Big Difference.

One Small Step Can Change Your Life by Robert Maurer, Ph.D., was another eye-opener for me. Dr. Maurer bases his book on the principal of kaizen, small incremental changes known for helping the Japanese develop a thriving industrial base after WWII. He encourages us to:

• Ask Small Questions
• Think Small Thoughts
• Take Small Actions
• Solve Small Problems

Together, he says, these actions can create radical change (over time). They work, he explains, because our brain is hard-wired to resist change. Even the prospect of a change can trigger our fight-or-flight response, which in turn shuts down creativity and thinking. Small changes allow us to bypass that automatic response and succeed in changing. When Maurer talks about small change, he means small. Can’t exercise? Start with one minute of marching in front of the television. Overeating? Throw the first bite of chocolate, or one French fry, away (I am working on the chocolate one!). It sounds a bit ridiculous at first, but the idea is to help rewire the connections in your brain so that it enjoys your small successes, and doesn’t interfere as you try to build upon them.

Strategy: Overspending? Put one item back when you reach the check out line. Can’t save? Start by saving one dollar from your paycheck, or one dollar a day. Having trouble getting out of debt? Each day, ask yourself one small question: What is one small action I can take to reduce my debt? Your brain loves questions, says Maurer, and by posing those small questions frequently, you will put it to work coming up with solutions.

Also Smart: Forget the lottery or “all or nothing” mentality. Maurer says you don’t need (or perhaps don’t even want) a radical idea to be successful. The Japanese completely reinvented their economy and work style with the principle of kaizen…one very small step at a time. You can too.

Your First Step: Keep track of how your spending and money management are impacting your finances — your credit in particular — by regularly checking your credit scores. You can get two free credit scores, plus a personalized action plan for improving your scores, using our credit report summary tool.

This article has been updated. It was first published April 1, 2009.