Are you worried about your financial security? For those among us who are living paycheck to paycheck, this is a huge stressor. If living one paycheck from broke is all too familiar, you are not alone.
According to the Financial Planning Association, more than half of the American population has very little in savings and is totally dependant upon the next paycheck to meet living expenses. Relief can be as close as cutting back on those expensive coffee drinks or oversized muffins on the way to work each morning.
How about the snacks from the vending machine, the lunches, the takeout dinners, the soda, the cigarettes and, yes, the chocolate candies, too. You will be surprised to see that you can save a good amount of money each month from the cash you spend on unnecessary little expenditures. These expenditures are what David Bach, author of "The Automatic Millionaire," calls the "Latte Factor."
So you don't think you have a Latte Factor? When was the last time you calculated what you spend daily on drinks, snacks or takeout meals? These expenses alone can add up quickly and amount to more than $150 to $200 a month. Why not identify them and start to eliminate them to free up some additional cash each month?
If splurging on the little unnecessary expenditures is not for you, maybe you are actively involved with "keeping up with the Joneses," maxing out credit cards on clothes, extravagant dinners or vacations, borrowing to maintain a lifestyle your paycheck cannot cover.
Either way you can step off the paycheck-to-paycheck train with the following steps to financial fitness:
1. Set your financial goals. You cannot get there if you do not know where you are going. Think of it this way: Without goals, your daily routines are like a boat on the sea of life without a rudder, floating aimlessly, unable to determine your final destination. Give yourself a new sense of direction. Write down your goals and post them where you can see them every day. Live your goals by taking the steps needed to meet your goals.
2. Track your daily expenditures. Keep a detailed list of every penny you spend for a month or two, from a pack of gum to lunch to movie tickets. Jot it down on a piece of paper or notebook. At the end of the month, review your spending and determine how much was needless and where you can cut expenses to create excess cash.
3. Develop a spending plan. Cash flow is king, so we need to track cash coming in and cash going out regardless of what you earn. Develop a monthly spending plan or budget you can commit to. Categorize your expenses and use a computer software program like Quicken or Money to help you get organized. If a computer is out of the question, you can just as easily use a notebook.
4. Save for retirement first. Before you pay any of your bills, make sure you set aside at least 10 percent of your paycheck automatically to go into your 401K plan or IRA account. This will help to discipline you and ensures that you are investing in your financial future.
5. Reduce your credit card debt. If you are paying the minimum balance on your card, it can take a very long time to reach a zero balance. One way to get rid of debt quicker is to target the credit card with the highest annual percentage rate and pay more on it each month, while paying less on others. If you have multiple cards with annual percentage rates in excess of 12 percent, consider applying for a card with a lower interest rate or zero interest rate and transferring your balances.
Make sure you find out how long the low rate is effective. Check out bankrate.com or cardweb.com for good deals.
6. Live below your means. When you are making those daily purchases, ask yourself: Can I live without this? Do I really need to spend hundreds on cell-phone chitchat? Or pay $600 for those Armani shoes? Living below your means requires you to spend on what you need, not on what you want. You can live below your means if you change some of your behaviors, such as eating out less, brown-bagging it more often or renting movies instead of going to the theater. Stop charging; pay with cash instead or use your debit card.
7. Stop giving the government an interest-free loan. If you receive a large income tax refund each year, consider revising your income tax withholdings to increase the amount of your take home pay. Use the extra pay to build up an emergency fund, repay debts or save for your retirement.
Free yourself from living paycheck to paycheck, and you will be well on your way to achieving financial fitness and some peace of mind as well.
Karen Elise Kilbride is a Certified Financial Planner trademarked termpractitioner and certified public accountant who provides fee-only
financial planning advice at On-Course Financial Planning LLC. She can be reached at 775-1177 or via e-mail at Kilbride@oncoursefinancialplanning.com
