Tips for ending a bad money cycle

Living paycheck to paycheck causes obvious stress. Even worse, it puts you at risk for financial disaster when an unexpected expense or loss of income drives you to credit cards and mushrooming debt. Here's how to escape this vicious merry-go-round.

Economists at Princeton and New York University estimate that one-third of all U.S. households live paycheck to paycheck. Some of these households hold a small number of assets but many have hard-to-access illiquid holdings such as houses and retirement accounts.

You need to make a few changes in your lifestyle. Instead of feeling deprived when cutting costs, think of what you'll gain.

After gaining control of your finances, you can pay off debts, build an emergency fund to protect your family, save for large purchases and invest for a comfortable retirement.

To put your money where you want it, track your spending to understand your current habits and needs.

You can use online tools like Mint.com or downloadable software like You Need a Budget. If you like low-tech solutions, keep your paper receipts for a month. Once you form a view of your spending, create a realistic spending plan.

To supercharge your savings, pull out cash for frequent outlays like groceries and entertainment.

Have a gym membership you don't use? Subscribe to a magazine you barely read? Can you switch providers to reduce your phone bill, or call your utility companies and negotiate a lower rate?

Making these changes takes effort, but from then on you keep saving with no additional effort. Cutting costs doesn't automatically mean that you deprive yourself.

If you have cut costs to the bone, consider how you can earn more.

Ask your boss for a raise. Find a part-time job for a few months or do odd jobs for friends, family and neighbors. Do freelance or consulting work or use sites like eBay to sell possessions you no longer want or use.

Start a nest egg before you do anything else with your money. Set up a savings account with an automatic transfer right away. You might miss the cash, but if it's out of your hands, you're less likely to spend it.

Eventually, you want to invest for retirement. If your workplace offers a 401(k) plan or an individual retirement account, take advantage. Again, since the money comes out before it even hits your pay, you'll barely notice it's gone.

Once you escape a hand-to-mouth financial life, make sure you never go back. As your income increases over time, use at least half to fund your wealth-building plans.