Break the cycle of living paycheck to paycheck

It's Monday and for many people, payday was just on Friday. While you're not broke, you still worry about money. Because if your water heater breaks down and you don't have money to fix it, you're on the verge of going into debt...or possibly into more debt. Sound familiar? If so, you're not alone. Many, many Americans can't afford a $1,000 or even $400 emergency. Instead of going into panic mode, here's what to do to break that vicious cycle of living paycheck to paycheck.

Step 1: Find 'Extra' Money

To break the cycle, you first need to make some spending reductions. You may have to make some tough decisions on what to cut or reduce.

Because if you worry about money or have no emergency fund, then you absolutely need to reduce spending.

Look at your discretionary spending - items or services that aren't necessities. For instance, can you cut or reduce cable or internet, cell phone plans, dining out, gym or other memberships, coffee shop trips, streaming subscriptions, etc.? You don't necessarily have to change your lifestyle if you can make several small changes.

Step 2: Build Savings

An emergency fund is the best way to help avoid a financial crisis and debt. Now that you have made some reductions/cuts in spending, use what you're not spending and put it toward savings. Aim for $50-100/month if you can. Again, several small spending reductions can add up.

Start simply by setting up an automatic deposit from each paycheck into a separate savings account. Make it difficult to withdraw that money so that you're not tempted to use it for anything but an emergency.

Step 3: Take Advantage of Cash Windfalls

Some people are still waiting for their tax refund. If you're getting a refund, use it to get ahead financially. If you're behind on any bills, pay those first. Then, use whatever is left over to build emergency savings - especially if you have nothing set aside yet. Use other cash windfalls in the future, i.e., bonuses or profits from garage sale/selling things the same way.

Step 4: Stick to Your Spending and Saving Plan

In order to reach your goal of building wealth instead of living paycheck to paycheck, continue to reduce spending and save money for a while. Ideally, you should have three to six months' worth of your monthly expenses set aside in savings in case of emergency or income loss.

Step 5: Save for Retirement

This one might seem ridiculous in your current financial situation. But it's really not. Retirement savings should be on your radar as early as possible. If you have the option of retirement accounts through your employer, start contributing ASAP. And if they offer a match program, take full advantage of it. For more tips, read "Three Ways to Save for Retirement."

Author Elaina Johannessen is a Program Director with LSS Financial Counseling.