Resolved: Use incentives to whip your budget into shape

It's easy to dismiss New Year's resolutions. After all, how many gym memberships have you bought in a sudden burst of enthusiasm only to stop going after a couple of weeks? The same rhythm of enthusiasm and disillusionment holds with household budgets. We mean well, we really try, but life interferes and old habits and coping strategies reemerge. The next thing you know you're back in the hole, saving too little and spending too much.

However, New Year's resolutions do matter. The combination of the holidays and the turn in the calendar inevitably gets us thinking about where we are in life, what we value, and how we'd like to do better going forward. As Oprah Winfrey has said, "Cheers to a new year and another chance for us to get it right."

So when it comes to money resolutions how can you stick to your goals? First of all, cut yourself some slack. Don't try to do everything at once. You need to be realistic about what you can accomplish. Focus at most on one or two financial issues. And, most importantly, realize that small steps add up into large changes.

Secondly, engage with your community. Talk about what you're trying to do with friends when you get together at a coffee shop or on social media websites such as Facebook and Myspace. We all feel an obligation to live up to what we say with friends.

You can also tap into the power of money as a commitment strategy. That's what economist Peter Orszag does. In an interview on National Public Radio, Orszag, director of the White House's Office of Management and Budget, said he tries to use economic insights not only as a government official but in his private life as well. He's a marathon runner and to keep motivated he built a financial penalty into his training regimen.

"If I didn't achieve what I wanted to, a very large contribution would automatically come out of my credit card and go to a charity that I very much didn't support," says Orszag. "So that was a very strong motivation, as I was running through mile 15 or 16, to remind myself that I really didn't want to give the satisfaction to that charity for the contribution." He didn't name the charity.

Orszag's technique is one that economist Richard McKenzie would endorse. He came up with his own "Economist Weight-Loss Incentive Plan." McKenzie described the motivation for his "dieting for dollars" approach this way in an article in the Wall Street Journal: "I had been trying to lose 10 pounds for what seemed like a decade. I had lost about 378 pounds during my struggle, only to remain nine pounds short of my target weight."

Professional economists might be more sensitive to financial incentives than the normal person. For others, the desire not to let down their friends is incentive.

My motto: Whatever works for you.