Tired of living paycheck to paycheck? 9 steps to financial fitness

Tired of living paycheck to paycheck? 9 steps to financial fitness
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IF LIVING ONE PAYCHECK FROM BROKE HAS YOU STRESSED, YOU'RE NOT ALONE, JUST keeping company with the 60 percent of Americans who have no savings and are totally dependent on the next paycheck to meet living expenses. According to the Financial Planning Association, not all of them are low-income earners: A third make $75,000 or more a year. But relief can be as close as cutting back on those cups of luxury latte and the oversize, overpriced muffin you buy each morning. Or your daily snacks from the vending machine at work. Or the pricey lunches and take-out dinners. Or the routine manicures. Or lottery tickets. And cigarettes, for sure. Crunch some numbers and you'll be surprised to see that you can save big bucks every month from the money you blow each day on unnecessary little expenditures--wasteful spending that David Bach, author of The Automatic Millionaire (Broadway Books), calls your "Latte Factor."

Don't think you have a Latte Factor? When is the last time you calculated the amount you spend daily for drinks, food and snacks? These alone can eat up more than $200 a month. "The sooner you identify those unnecessary expenditures, the sooner you can start eliminating them," Bach says. "And the sooner you do that, the more extra money you'll be able to put aside."

But what if you don't splurge on little things but on "keeping up with the Joneses"--maxing out credit cards on clothes and deluxe dinners, burrowing deeper into debt to maintain a lifestyle your paycheck can't cover. You can climb off the paycheck-to-paycheck treadmill with these nine strategies:

9 steps to financial fitness

1 TRACK DALLY EXPENDITURES

Keep a detailed list of every penny you spend for a month or two--from the packs of gum to movie tickets to lottery tickets to lunch. Jot it down in a notebook or on a piece of paper and keep receipts together in an envelope. At the end of the month, examine your spending and determine how much was needless and where you can cut back to create surplus. "It's a very eye-opening exercise to track where every dollar is going," says Tim Wyman, a certified financial planner in Southfield, Michigan. "You'll realize how much you're truly spending on that morning coffee or lunch."

2 DEVELOP A SPENDING PLAN

"Regardless of how much you earn, you should take account of what's actually coming in and what's going out," Wyman advises. "Until you have a plan, you're walking around in the dark." And it should be a monthly spending plan, or budget, you can commit to. Start by categorizing your expenses and noting how much of each paycheck is needed to cover each category. You can use a notebook, a ledger, worksheet, BudgetMap checkbook register (budgetmap.com) or a computer software program like Quicken, Microsoft Money or My Budget Planner. Aim each month to end up with a budget surplus--money saved rather than spent. Reevaluate your budget quarterly and make adjustments as needed.

3 WATCH YOUR APR

When's the last time you calculated the amount you're paying each month to finance credit-card debt? "Even when an item is on sale, if you charge it and carry a balance, with interest you end up paying up to four times as much for it," says Bonnie Hughes, a certified financial planner (CFP) in Rome, Georgia. Let's say you have three cards, each with a $3,000 balance at a 15-percent annual percentage rate (APR). In paying just the interest alone, at the end of a year you'll have shelled out $1,350--and in five years, $6,750, at the rate of about $112 a month.

4 SLASH CREDIT-CARD DEBT

If you're paying the minimum on credit-card debt, it can take you almost forever to reach a zero balance. For example, if you owe $2,000 on a card with an 18-percent APR, it will take you 30 years to pay off that amount if you pay only the minimum amount due. One way to get rid of credit-card debt quicker is to target the card with the highest APR and pay more on it each month while paying less on the others. Another strategy is to pay off the card with the smallest balance first, then pay the card with the next smallest balance, and so on. Each time you pay off one debt, take the amount you had allotted for that payment and put it toward the next targeted bill. But keep in mind that any method you choose will only work if you avoid running up more debt, Hughes points out. And if your credit card has an APR higher than 12 percent, consider applying for a card with a low- or zero-interest rate and transfer your balances to it. Be sure to find out how long the low rate is effective. For info on finding a good deal, check out bankrate.com or cardweb.com.

5 SET FINANCIAL GOALS

"If you don't know where you're going, you'll never get there," Wyman points out. Decide on short- and long-term goals, and develop an action plan to make them happen. Let's say you want to pay off all your credit-card debt or contribute more to your 401(k) or retire at age 57. Make your goals specific and measurable, like: "I want to save $75 more each month ($2.50 every day)." Then determine what specific steps you'll take to reach your financial goal, such as bringing your lunch from home at least four days a week or buying regular coffee instead of the pricey brews. Make sure you write your goals down; review them regularly.

6 LIVE BELOW YOUR MEANS

Ask yourself: What can I live without? Do I really need to spend $75 or more a month for a deluxe cable plan? Or spend hundreds on cellphone chitchat? Or pay $549 for a Gucci handbag? Living below your means requires spending on what you need, not on what you want or what your girlfriend has. You can do it if you change some of your behaviors, such as eating fewer dinners out, brown-bagging it or renting movies occasionally instead of going to the theater. And stop charging: pay with cash or use a debit card. If your take-home pay is $30,000 a year, try spending as if you're getting $25,000. You can use the other $5,000 to pay off debt, create an emergency fund, invest more in your 401(k), or make a down payment on a home. You can build a sizable nest egg if you make a conscious effort to monitor and cut spending.

7 PAY YOURSELF FIRST

Before you pay your rent, mortgage, bills or car loan, have at least 10 percent of your paycheck automatically deducted to go into a savings account, your 401(k) or individual retirement account (IRA). This will discipline you. And it guarantees that money is saved and invested to secure your financial future.

8 GROW YOUR PAYCHECK

If you typically get a fat tax-refund check, one way to get more money in your paycheck is to increase your tax-withholding allowances on Form W-4. Each allowance reduces the amount of tax that's withheld from your paycheck. So instead of giving Uncle Sam an interest-free loan, use that money to build up an emergency fund, Hughes advises.

9 EXPLORE OTHER OPTIONS

Supplement your income by finding a better-paying job or part-time work, and earmark the additional money for paying down debts. If your debt is overwhelming, ask your creditors to lower the interest rate or the minimum amount due. For credit counseling or debt-reduction services, contact the nonprofit National Foundation for Credit Counseling at nfcc.org or debtadvice.org, or call (800) 388-2227.

SAVE BIG BUCKS ON BILLSYou can save thousands of dollarsin interest by paying a fewdollars more on your credit-cardbills each month. Let's say youowe $2,500 at a rate of 15 percent.Instead of shelling out justthe minimum amount due, trypaying $3 extra each month.You will save $881 in interestand finish paying the debt 7years sooner. The chart belowshows that if you:                    and becomeAdd this   You'll   debt-free thisamount:    save     much sooner  $3         $881    84 months $25       $2,559   221 months $50       $2,983   251 months$100       $3,261   270 monthsFrom Invest in Yourself (Wiley). Printedwith permission from John Wiley & Sons.

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