Stop Living Paycheck to Paycheck

By tracking your expenses, setting goals and cutting costs, you can avoid scrambling to make ends meet each month and actually start saving money.

In this economic climate, more of us are struggling to pay the bills, buy groceries and fill up our gas tanks. Paying off the mortgage, putting the kids through college without financial aid and amassing $1 million for retirement seem out of the question now. Just having cash left over at the end of the month would be nice.

Accumulating a nest egg -- or even saving for a rainy day -- gets put on the back burner for many who find themselves just trying to get by. However, you can break out of the paycheck-to-paycheck rut, pay off debt and actually start setting aside money. The key is to start tracking your spending, develop a budget, set goals and make sure your not paying any more than you have to on your debts.

Track spending and watch expenses

"People who live paycheck to paycheck have to take a hard look at what they're spending money on," says Kathleen Campbell, president of Campbell Financial Partners in Fort Myers, Fla. "It's like when you try to lose weight and you don't think you eat that much -- until you start counting calories. It comes down to trimming what you spend and maximizing where your money is going."

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Start by tracking your spending on a daily basis -- down to how much you paid for a cup of coffee. Campbell suggests using a notepad, software such as Quicken or a free budgeting Web site, such as, to record everything on which you spend money. The list needs to be more detailed than just "groceries, $400; gasoline, $200." Write down exactly what you bought and how much it cost.

Don't stop with the obvious expenses such as utilities, gasoline, food and recreation, though. Look at how much you're spending (perhaps unnecessarily) to maintain bank or investment accounts or pay down debt. High fees on checking, savings and retirement accounts can eat away at your earnings. And high interest rates on credit cards and loans can force you to pay more than you have to over time.

This exercise can be time consuming and frustrating, but you need to know how you're spending your money before you develop a spending plan. "Until you know what's going out, you can't get a handle on it," says Lisa Byles, owner of Byles Financial Planning in Richmond, Va. "Then decide where you can cut."

Start cutting

Sometimes it can be painless to cut back -- especially if you've been spending money on unnecessary things. Even a small income can go a long way if you make minor changes, such as eating in rather than dining out -- which is the biggest expense most people easily can cut, says Campbell. Don't just eliminate dinners out -- cut out those work-day lunches at fast-food joints, which can be pricey, too.

Here are several other ways to cut your spending:

  • Cut interest rates. If you're living paycheck to paycheck, you might be living beyond your means, too, by using credit cards or loans. If you're just making the minimum payments, you're racking up a lot of interest and just throwing your money away, Campbell says. To make a dent in that debt, here are ways to get lower rates -- and lower monthly payments, too.If you have a good credit history, call your credit card company to ask for a lower rate. Or find a card issuer that offers low fixed rates to cardholders with good credit.Or you can take advantage of low-interest introductory offers and balance transfers. Many credit card companies offer 0% interest on balance transfers for a limited time -- usually four to six months. With no interest, your monthly payments will make a bigger dent in your balance. This can be a great strategy for someone who is well organized. You'll have to keep track of when the introductory rates expire and be sure to pay up or move on.Your best bet, though, is to avoid using cards altogether. Find out how to break the credit-card habit.
  • Find deals. Lower your monthly long-distance bill by replacing a land line with free Interent phone service, such as Skype. To find out how you also can save on cable, cell phone and electricity costs -- as well as travel and shopping -- see Save Money on Practically Everything.
  • Lower insurance costs. You may be paying more than you have to for auto insurance. Remember, Campbell says, insurance is for catastrophic events, not the small dents and dings you could pay to fix. So consider raising your deductible and follow these other tips to lower your car insurance premium.You might also consider raising the deductible on your homeowners insurance to lower your monthly rate. And you can cut health insurance costs by pairing a high-deductible (low premium) policy with a health savings account, which lets you contribute pretax money to cover out-of-pocket medical expenses. Just don't ditch your health insurance altogether or you'll find yourself in serious financial trouble if you need to take a trip to the emergency room or become seriously ill.
  • Lower student-loan payments. You can lower your monthly payments by consolidating your loans through the Federal Direct Loan Program. This will allow you to refinance your loan at a low fixed rate and stretch it out over a longer term.
  • Avoid unnecessary fees. You're probably well aware that you get slapped with a fee every time you're late on a credit card payment. You also probably know that you'll have to shell out a few extra bucks to use an ATM other than your own banks. But did you ever stop to think how these fees and others eat away at your budget? For example, why pay for a checking account when there are plenty of free ones out there? Even if you have free checking already, make sure you're not getting slapped with nonsufficient funds or other fees.If you have a brokerage or investment account, you also might be paying more in fees than you realize. For example, if you have an IRA with a brokerage or mutual fund company, you're probably paying for someone to manage the account. If you have stocks in that account, you might have to pay a commission every time you make a trade. There may be other fees, too, but you might not be aware of them because the expenses are deducted before the fund reports results to shareholders.Save on fees by using inexpensive online brokers, selecting low-cost mutual funds and making sure you are aware that some investment vehicles, such as annuities, come with higher fees.

If you're really snowed under, small spending cuts won't be enough, Byles says. Look at major cuts, such as downsizing to a smaller house or buying a less-expensive vehicle or ditching your car altogether if you live in a city with good public transportation.

Set goals

To motivate yourself to spend less, establish an achievable goal that you can get excited about. "It's easier to follow your budget if you know in doing so you can retire or send your child to college or take vacation," Byles says.

When establishing your goals, be sure to differentiate between wants and needs. Short-term needs, like buying a new car to replace one that's barely running or paying for a costly medical procedure, are your top priority. Longer-term needs, such as a retirement fund, are priority number two. And wants, such as a vacation in the Bahamas, fall to the bottom of the priority list.

If you're married or have a significant other, make sure you set and prioritize your goals together -- without criticizing one another's spending habits. Each of you should write down five goals, then compare lists to see which you agree on and how to prioritize them. You need to know what direction you want your financial lives to take before crafting a budget to get there.

Boost your income

Another way to help avoid living paycheck to paycheck is to increase your income -- without begging for a raise or switching careers. Start by adjusting the amount of taxes being withheld from your paycheck. Our user-friendly calculator can give you an idea of how many more withholding allowances you should be claiming on your W-4 form.

Then look for other ways to keep more of your paycheck going into your pocket instead of Uncle Sam's. For example, employer-sponsored programs that allow you to contribute pre-tax money toward routine expenses -- such as health care, child care or retirement savings -- can help your paycheck go further. And take advantage of your company's 401(k) plan if your employer matches contributions. If you're not contributing enough to this retirement plan to get the employer match, you're throwing away free money, Campbell says. Plus, your contributions lower your taxable income and go straight to a money-earning account before you can get your hands on it and spend it.

If you need more help, find a fee-only financial adviser who charges by the hour. Most would be happy to spend a few hours with you in order to help you prioritize expenses and set a budget, Campbell says. Try the Garrett Planning Network for a fee-only planner near you.

Cameron Huddleston
Former Online Editor,

Award-winning journalist, speaker, family finance expert, and author of Mom and Dad, We Need to Talk.

Cameron Huddleston wrote the daily "Kip Tips" column for She joined Kiplinger in 2001 after graduating from American University with an MA in economic journalism.