8/20/2012 2:15 PM ET|
3 money tips for every income
Upper middle income: $60,000 to $100,000
In high-cost areas, your income may not feel lavish, but you're now earning more than 60% of your fellow Americans. With higher income comes new challenges, so follow the tips for middle-income earners and consider the following new ones:
- Add a Roth IRA. Most people will be in a lower tax bracket in retirement, so it makes sense for them to grab tax breaks now by making deductible contributions to 401k's and other retirement plans. If you have a decent income and are a good saver, though, when you retire you could be in the same or even a higher tax bracket. In that case, it may make sense to contribute to a Roth individual retirement account in addition to funding a 401k. Contributions to Roth IRAs aren't deductible, but withdrawals in retirement are tax-free. Your future tax bracket is tough to predict, but if you're young and earning a good income or you expect higher tax rates down the road, contributing to a Roth now can pay off. If it turns out you don't need the extra money for retirement -- a big if -- you could use it to pay your kids' college expenses or leave tax-free money for your heirs.
- Pay cash for luxuries. Your access to credit usually expands as your income rises, which means it's easier to overdose on debt. Try not to borrow money for anything that will decline in value, and save up to pay cash for luxuries such as vacations, new cars and home improvements.
- Save for college. A college education will be increasingly important if you want your kids to succeed financially. You may qualify for some financial aid, but don't expect much in the way of "free" money; you're more likely to get loans than grants. Every dollar you can save for their future education can spare them a dollar or more in debt.
Upper income: Above $100,000
Here's a bonus tip: If you make six figures, don't complain in public how strapped you feel. The 80% of Americans who make less than you don't want to hear the whining.
Of course, you know the reality: that money problems exist at every income level. Here are some tips for coping, in addition to the ones you've already read:
Boost your liability coverage. A six-figure income can make you more of a lawsuit target, so max out your liability coverage on your auto and homeowners or renters policies. If your net worth exceeds those liability limits, consider adding an umbrella or personal liability policy that can offer even more protection. A $1 million policy typically costs from $300 to $400 a year.
Hire a tax pro. Getting tax help can make sense at any income level if you own a business or have a lot of investments outside of retirement accounts. Once you're in a higher tax bracket, though, it can make sense to have someone who can not only file your returns, but also help you plan to reduce your taxes and answer any tax-related questions you might have.
Talk to a fee-only financial planner. A session with a financial planner (one who is compensated only by the fees you pay, rather than by commissions on financial investments he or she sells) can be a good idea for anyone. But good advice doesn't come cheap, which is why many lower-income folks opt for a do-it-yourself approach. At your income level, you should make the investment in someone who can help you make sure you're on track for retirement, college savings and other goals. Expect to pay a few hundred bucks for a portfolio review and $2,000 or more for a complete financial plan. You can get referrals to fee-only planners from the National Association of Personal Financial Advisors and from the Garrett Planning Network, which represents planners who charge by the hour.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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