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Get Out of the Paycheck to Paycheck Trap

Different studies have shown that one-half to two-thirds of people are living paycheck-to-paycheck. That is a pretty alarming statistic! This can be explained in part by the results of the current economy, our own attitudes about money, and the lack of adaption to a changing world.

Change Your Attitude

The place to begin is with your mindset. Regarding paycheck-to-paycheck living, you may well think that “it’s just the way things are” or “everybody’s doing it”, both of which are untrue. Keeping these attitudes will ensure that you will never improve your situation.

Take a little time to think about what got you into your current situation. In an article from Celebrating Financial Freedom entitled “4 Steps to Escape the Paycheck to Paycheck Life for Good”, the author identifies the following damaging mind and behavior impediments to financial health.

• You Have Concluded That Debt Is Just A Part of Life – Contrary to what some may think, you do not have to be in debt to survive in today’s world. You must decide to make paying off your liabilities your number one priority!
• Luxuries Have Turned Into Needs – Certain luxuries like cable TV, an expensive car, and eating out often have evolved from extras into necessities. These extras will bleed your budget.
• You Are Not Earning Enough – You might be underemployed and making too little effort to maximize your work situation.
• You Are Overspending – You also might be spending more than you make, a common trap for some people. This needs to be controlled.
• You Have No Plan – Basically, you spend your money until it is depleted having no idea where it goes. You really need a plan.
• Money Is So Easy To Spend – Those credit cards feel so easy to swipe and sign—it doesn’t quite feel like cash. Yet it is, and then comes the interest.
• You Have A Spending Problem – You have no self-control when it comes to spending, and you may even be a shop-a-holic.
• The Job Market Has Changed – Certainly, the job market has changed, and continues to change. You must learn how to deal with those changes. On this topic, the author recommends a book by Dan Miller entitled “48 Days to the Work You Love – Preparing for the New Normal.”

With some increased awareness of how you got to be where you are, are you now ready to begin your journey to financial health? Here are some specific steps to take along with some helpful links.

Get Out Of Debt

You must come to the realization that debt is a choice. Interest and fees will drain away the money you have earned. Eliminating your debt is the best place to start to reverse your situation.

Here are some areas in which you can save money.

1) Food – Reduce the number of times you eat at restaurants. Pick up some healthy ingredients at a market and make your lunch. This can result in major savings for you. Some more food savings tips for you. Use coupons.
2) Car – Another expensive spending category. If you are able, unload your car payment. Maybe even trade down to a used automobile. Other ways to reduce care expenses are: change oil less frequently, sign up with Automobile Club for roadside assistance, research repair costs, and delay trading in your car. Consider carpooling to work. Assess your car insurance needs. If you have an older car that’s paid for, consider doing without collision and comprehensive insurance. Maintain a clean driving record, and be aware of low-mileage discounts, multi-lining with other types of insurance, and group automobile insurance plans from employers, professional, alumni, and other groups.
3) Entertainment – Consider getting rid of your cable TV for Netflix or Hulu. Here are some fun things to do for free. Go to the library for books and DVDs. Take advantage of free music and museums.
4) Clothes – You do not need fancy clothes if you are in debt, Shop with sales, go to thrift stores and discount racks, buy second hand, request clothes for gifts, take care of the clothes you have, and sell clothes you no longer wear.
5) Eliminate Credit Card Debt – Start by calling your credit card companies to see if they will lower your interest rate. The average interest rate for credit cards is around 15 percent but some can go as high as 30 percent. A study was conducted in 2002 which found that half of the participants who requested a lower interest rate were given one. Consider transferring that debt to a lower interest account or arranging a loan to consolidate your debt. If these options are not feasible, prioritize your debts so that you pay off the ones with the highest interest rates first.
6) Medical Debt — You can start by offering to pay cash, if you have it, while still at the hospital or doctor’s office. This can save you 5, 10, or 25 percent right off the top. If you end up paying more than the total bill, you will get a refund. If less, you will be responsible for the rest. When you get a bill in the mail: The portion of your bill which says you “may (not will) owe”, can be negotiated. Compare what the bill says your insurance didn’t cover with what your insurer’s policy states that they do cover. If there is a discrepancy, call the doctor’s office to have it remedied. Your provider can also put your bill on hold for 30 to 60 days to avoid it going to a collection agency. Notify your provider about any secondary insurance you may possess. If you already have medical debt, ask about any partial forgiveness programs or request a payment plan with 0 percent interest. Sometimes you can obtain a repayment plan for a year or longer.
7) Student Loans – There is a Public Service Loan Forgiveness Program which can permit those in the military, teachers, non-profits, or public service jobs to have their loans forgiven completely. There are other programs such as Income-Based Repayment which will allow you to pay less than your regular payment if you don’t earn enough income. If you want to pay off your balance more quickly, begin bi-weekly payments.
8) Mortgage and IRS Debt – Reduce your mortgage debt with bi-weekly payments. For IRS debt, try arranging an installment plan with them.
In an article entitled “The #1 Way to Stop Living Paycheck to Paycheck” by Alex Thomas Sadler, she offers three useful applications for getting out of debt. They are Pay Off Debt, Ready For Zero, and DebtTracker Pro.

Increase Your Income

Even with cutting your expenses as much as you possibly can, you still may not be able to cover everything. You now need to shift your focus to earning more money. Think about improving your present situation and income at your current job, getting a part-time job or side job, or some combination of these. Take some work-related classes and possibly earn a certificate to boost your income. Your job will often reimburse you for tuition and books. Some other ideas for you: you can do freelance work (and that does not include just writing), become a virtual assistant, bookkeeping, designing, and more. You might enjoy tutoring a subject you enjoy. Sell items you don’t need on eBay and Craigslist. Some more money making ideas for you.

Prepare And Stick To A Monthly Budget

By preparing a monthly budget, you can track where the money comes in and goes out. Begin by examining your expenses for the previous month for necessary items like your mortgage or rent, car insurance, groceries, gasoline, etc. Then figure out how much you want to spend each month. Post that number somewhere, pay in cash whenever you can and even consider initiating automatic deposits from your paycheck that will go directly to decreasing your debt. Do this so that you will not be tempted to buy unnecessary luxury items.

The following is a link to more valuable articles on budgeting: http://www.cfinancialfreedom.com/budgeting-budget-excuses-overcome/

Here are five applications that can assist you creating a budget and tracking your spending/savings goals.

• Level Money keeps track of your spending and gives you a sense of how you’re doing. It is free and will probably work best for those who have relatively simple and linear financial lives.
• Mint is a very popular app that helps you create a budget and then tracks your spending, monitors your credit score and keeps up with potential fraud by automatically downloading transactions from bank, credit card and investment accounts. The service allows you to combine all of your finances in one place — giving you a constant overview of your financial status. You can also set up alerts and automatic bill-pay.
• Budget Boss is a highly visual app that uses graphs and charts to track your budget and goals. It also estimates your future account balances, depending on your current spending habits.
• HomeBudget (iPhone only) is an app that lets you manage account balances, budgets, and bills. You can set up credit and debit accounts and track balances, and it syncs data with other iPhone users and can export to a desktop. Users can take a picture of the receipt and associate it with a “family sync” feature that allows members of the household to exchange information and work together within a single budget.
• Wally is a tool that shows you what comes in, what goes out, what you have saved and what you have budgeted. Wally helps you get a better understanding of where exactly your money is going, and then helps you set up, as well as track and achieve, various financial goals.

Make A Plan

In addition to budgeting, come up with a plan on a more macro level on how you can stop living paycheck-to-paycheck. Figure out what your big priorities are for both your near and long-term future. These might include buying a house or a car, taking a big vacation, creating an emergency savings fund, or saving for retirement. Remember that paying off debts will improve your credit score for those bigger purchases. Stop wasting money on the little things you don’t need so you can acquire the bigger things you do need later on. Make your goals realistic so you won’t be discouraged. Spend time with similar people, people with responsible prudent mindsets—spenders can drag you down. Finally, celebrate your successes in eliminating your debt!

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