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How to Stretch Your Paycheck

No matter how much you make or how carefully you budget, chances are your family income simply doesn't stretch far enough. Between diapers and day care, groceries and gas, and clothes and commuting, your money disappears faster than a pint of Ben & Jerry's on a hot summer day. In fact, after you've written the check for the mortgage, paid the baby-sitter, replaced the clothes that the kids have outgrown, and forked over a few bucks for takeout on the nights you were too tired to cook, your checkbook is hardly in any shape for you to even think about putting money aside for long-term goals like your children's college tuition or your own retirement.

In the end, that's the true price of living from paycheck to paycheck: You're unable to provide for your family's financial future.

To break that cycle and start putting money away for your financial goals, try these tactics:

Contributing editor Diane Harris is writing a book on women and finance.

YOU'VE GOTTA HAVE A PLAN

A spending plan, that is. To come up with one, you first need to pinpoint how much money you're spending and what it's being spent on. This means preparing a budget, a six-letter word that conjures up four-letter reactions in many people. But contrary to popular opinion, a budget doesn't have to mean sacrifice or slavish attention to every cent you spend. It's simply a device to help you see where cash may be slipping through your fingers and how to stem the flow.

To start, take a blank sheet of paper and write headings down the left side for major spending categories, such as food, housing, clothing, utilities, and health care. Then in the middle of the page, create a column titled "What We Spend Now," and start listing what you spend on each of those items each month. Don't rely on your memory; look over your financial statements for the past several months  -- check receipts, credit-card bills, ATM withdrawal slips, and the like  -- to total the actual amounts. Maybe even carry around a little notebook for a couple of weeks and jot down everything you spend out of pocket to get a handle on those pesky under-$10 outlays for mints, magazines, coffee, and similar items that usually fly under our personal radar. "Almost every single family that does this exercise ends up cutting its expenses by 10 percent or more right off the bat," says Lynn Ballou, a financial planner in Lafayette, CA. "Often, awareness is half the battle."

SET YOURSELF SOME GOALS

The most important step in launching your financial plan is to create a column to the right of the others called "What We Should Be Spending," in which you'll pencil in new numbers, lower but still realistic, for each of your spending categories.

Start by taking a hard look at your actual expenses to see if any categories jump out as ripe for trimming. If the amount you're spending on weekday lunches looks high, for instance, resolve to brown-bag it two or three times a week and cut that category in half. Are you shelling out a small fortune for cable TV? Get rid of those premium channels, or if you're really looking to save, ditch cable entirely. Do insurance costs seem painfully high? Look into policies with higher deductibles and save as much as 20 percent on your premiums. Is your car lease or loan a monthly cash-guzzler? Consider trading in your new ride for a used cream puff, which will cost less to purchase and likely be cheaper to insure.

But in your new zeal to cut back, don't eliminate spending for occasional dates with your spouse, outings with the kids, and some personal pampering. "Creating a budget that doesn't leave room for entertainment and a few little luxuries is like a diet that doesn't incorporate a few brownies," says Ballou. "People who don't budget fun, fail."

SLASH CHILD-CARE COSTS

For two-career parents, child care can sometimes eat up 20 percent of the household income, depending on how much they earn, where they live, and what kind of care they've chosen. The central dilemma: How to make this expense more affordable without sacrificing the top-quality care you want for your kids.

Your first line of attack may be available through your own employer, suggests Liza Lidke, a benefits consultant in Englewood, CO. Most large companies and a growing number of smaller firms offer programs known as dependent-care spending accounts that in effect allow parents to turn as much as $5,000 of their annual child-care expenses into a tax deduction. The potential savings could end up being more than $2,000 per year.

A small but growing number of companies also offer discounts or vouchers for use with local child-care providers. Your human-resources office can tell you if your employer is among them.

If neither you nor your spouse participates in a dependent-care spending plan at work, you may be eligible for a federal tax credit for child-care expenses, worth up to $480 a year for one dependent or $960 for two or more. To qualify, you must have a child under age 13. (Efforts currently under way in Washington could expand that credit to a maximum of $1,500 a year.)

Being a little bit creative with your child-care arrangements can result in big savings too. For instance, Lynn Ballou and her husband, an engineer, both work flexible schedules to eliminate the need for before- or after-school care for their two kids, ages 8 and 9. She starts early and ends early; he starts late and ends late. When the children were younger, Ballou also shared an in-home caregiver with two other families. "With three sets of parents sharing our sitter's salary, we could afford someone terrific at one-third the cost," she notes. "And both the kids and I ended up making great friends."

PAY YOURSELF FIRST

If you never have enough money to devote to savings once you've paid your bills, think of yourself first. This way, you won't consider saving money as something you do with the cash remaining after you've covered your expenses each month. Regard the amount that you've decided to save as another bill  -- indeed, your most important bill  -- and make it the first one you pay each month.

The simplest way to launch a pay-yourself-first program is to enroll in an automatic savings plan through your employer, bank, brokerage, or mutual-fund company. These plans make saving relatively painless by taking care of the discipline for you: You specify how much you want to set aside every month ($50 is usually the minimum) and that amount is automatically deducted from your paycheck or bank account and put into investments of your choice.

An added benefit: If you're the kind of parent who's in control of family finances, then you're more likely to raise kids who stay on top of their own.

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