Stop Living Payday to Payday

That's it... just one missed check and WHAM! Bye-bye status quo... hello debt collectors.

The truth is, the majority of us live beyond our means. We skate by, living payday to payday, juggling bills and squeezing pennies to make it until the next windfall comes along. But the problem with a payday-to-payday lifestyle is that when a payday doesn't come (and trust me when I say "it will happen"), our happy little world goes to hell in a handbasket (whatever that means :)

The solution then is to find a way to NOT rely on those paychecks. Yes, you read that right...we're going to work towards a life that doesn't hinge on your direct deposit.

How? How could that even be possible? It is and what's better, it won't even hurt to do it. Okay, maybe a little but I promise you that the rewards will be so worth it in the end.

Here's the painful part:

You're going to have to take stock of where you are. This means you're going to have to be realistic about your debt and your income. I know, I know... *groan*... But you can't fix what you don't know and the first step to knowing is acknowledging. So, here we go:

1. What's your debt to income ratio? This is actually very easy to figure out. Simply divide your monthly fixed expenses (house, car, credit cards and loans) by your gross monthly income (before any deductions). Theoretically, the result should be less than 30%, meaning less than 30% of your income goes toward your fixed expenses. Ideally, you should be shooting for something around 20%.

2. What's your REAL debt to income ratio? The problem with the calculation above is that it doesn't take any of the money-depleting factors into consideration. Health insurance for example is a pricey bill, even when you're buying it under an employer's plan. Taxes, child support, IRA deductions, all of these things can seriously drop your income before you even get the notice of deposit. And then there's the expenses. Gas, utility bills, groceries... I can't leave the grocery store without spending at least $40 to $50 bucks, even when I just go in to buy bread and milk. So, let's recalculate that debt to income ratio, shall we? Divide your total monthly expenses (yes, all of them) by your take-home pay. If you're spending more than 70% of your monthly income, you're seriously pushing your financial luck.
3. What expenses can you do without? Seriously, where could you cut costs if you absolutely had to? Make a list and estimate the amount you spend on each item. You're going to need it when we start downsizing in section 2.
4. How's your credit? Are your cards charged up to the limit? Could you take out a loan if you had to? And if you did, would you get a decent interest rate or are we talking double digits?
5. How's your savings? If your paycheck didn't come as planned, would you have something to fall back on?

Yes, I know I said "taking stock" was the painful part and for me, it was. Its all about your perspective. Don't think of it as giving something up. Think of it as paving the road to a financially free you :)

Remember that list you made earlier? The one that itemized the things you could do without? The things on this list are usually the things that never make it to your budget. Things like magazines, eating out, shopping and other luxury items that nickel and dime us to death.

To go from payday-to-payday to "payday whenever", you're going to have to make some sacrifices. Stop buying all those magazines every month or if you just can't stand the thought of it, at least cut your selection down to two. Learn to cook instead of heading to the restaurant all the time and contrary to what you might think, there is nothing wrong with peanut butter and jelly sandwiches once in a while. I've fixed eggs, gravy and toast for dinner when I thought I needed to cut back my spending. There's no shame in it and your family will walk away just as full.

What about your bigger items? Are you driving a car that you can't really afford? Do you pay someone to mow your lawn or handle seasonal landscaping? Learn to do it yourself and cut the expense. I know its nice having the best lawn on the block but if you don't get a handle on your money, that lawn might not always belong to you.

This is the "buckle down" time. Your moment of financial truth. If you really want to get ahead of your paychecks, learn to work with what you've got and stop waiting for the problem to "just go away".

While you're busy cutting costs, you could also be working on ways to boost your income.

Aside from working yourself to death with a second job (been there, done that), you've got some other options worth considering:

• Open your own business. Yes, technically this would be a second job but the difference is, you'd be working for yourself. In my book, "The Working Girl's Guide to Financial Freedom", I said that "you will never get to where you want to go if you wait for someone else to take you there". And I still believe that's true. Your employer always has a separate agenda from yours. They're looking at how they can make money, not how you can become financially independent. They like that you live payday to payday. It makes you vulnerable because you're dependant on them for your livliehood, which means you're much easier to manipulate. And even the best raises and bonuses won't get you to where you want to be. Use your paycheck for what it is - a temporary means to an end. And while you're using it, go out and discover all the wonderfully fascinating (and profitable) things you could be doing instead.
• Invest your savings. If you've got your savings in a traditional savings account, you're losing some serious bucks. Traditional accounts pay about .02% in interest which is why your savings account doesn't really seem to be doing much. At the very least, you should have your money in a high yield money market account (visit ING.com, Emigrant Direct and Capital One to name just a few). These accounts pay anywhere from 4 to 6% in interest (as of this writing) which can make a big difference in how well your money is performing. But don't stop there. Look at CD's, IRA's and yes, even mutual funds and stocks. Immerse yourself in the wacky world of investing and learn how to make your cash actually work for you. How do you think the rich and elite stay rich and elite? They invest, pure and simple.
• Sell. Whether its a garage sale or a listing on eBay, look around and start cleaning house. We all have knick knacks and other useless stuff that we don't really need but just can't bring ourselves to throw away. So don't. Sell it instead and then invest that extra cash in the money market account you just opened.

If you've got revolving balances on credit cards and loans, you're burning money. Credit card debt is killing this country, so much so that Congress even got involved and suggested that credit card companies start charging 3% of the balance as the minimum payment instead of the 1% they formally charged. The credit card companies complied of course, but also raised their interest rates right about the same time. The result is that the payday to payday folk had a dangerous increase in their monthly expenses but didn't reap any of the benefits from paying the extra toward their debt.

Want to know just how much you're spending on credit card debt? Bankrate.com has a wonderful little calculator that can show you just that. Plug in your interest rate, balance and amount of your regular payment and then see just how much interest you're really paying out. If you thought the "Taking Stock" section was painful, wait until you see this.

Start mastering your money and stick with it. Save where you can, invest when you can and boost your income every time you get the opportunity. It won't happen overnight, but with a good budget, a change in perspective and a whole lot of persistence, you can reach a point where your paycheck doesn't really matter at all.

And that, my lovelies, is what they mean by "financially free".