Updated: 8/7/2012 12:35 PM ET|
3 money tips for every income
Financial advice should be tailored to income level, from families below the poverty line to earners in the upper 20%. These tips offer a good place to start for any household.
If you've ever read money advice that didn't seem to apply to your situation, you may have been right.
Guidance that makes sense for a middle-income household might not apply if you're under the poverty line. If your income is on the lower end, you'll have different priorities and concerns than if your W-2 has six figures before the decimal point.
So I've tailored some tips using five income brackets that correspond, roughly, with the five income quintiles defined by the latest Current Population Survey, conducted jointly by the Bureau of Labor Statistics and the Census Bureau. Each bracket represents about 20% of U.S. households. There's plenty of overlap, since tips that apply to one bracket often apply to the ones above it as well. But these bits of advice will give you some idea of what you should focus on now.
Low income: Below $20,000
The official poverty line for a family of four is just under $22,000. Even if you don't consider yourself poor, you don't have a lot of financial wiggle room at the bottom of the income ladder. So here's what's most important:
- Save $500. Forget, for now, all the advice about saving three to six months' worth of expenses. That's a worthy "someday" goal, but you just need to save a few hundred bucks to start getting ahead. Having $500 set aside can help you cover minor emergencies and avoid payday lenders and bounced-transaction fees. For more, read "Why you need $500 in the bank." (These days, you should also consider a credit union instead of a bank. The fees tend to be lower, which is important when every dollar counts.)
- Get a break. If you earn income from a job or business, make sure you file a tax return and claim the earned income tax credit. This refundable credit, which is designed to help low- to moderate-income individuals and families, can put hundreds or even thousands of dollars in your pocket. Yet the Internal Revenue Service estimates one-fifth of taxpayers who qualify for this credit don't claim it. Another overlooked credit is the Savers Credit for low- to moderate-income workers. If you can put even a few bucks a year into a retirement account, you can get a tax credit for those contributions on top of being able to deduct them from your taxable income.
- Avoid businesses that will rip you off. Some types of businesses will charge you outrageous amounts of money because you're poor and may not have access to mainstream credit. These include payday lenders, rent-to-own outfits and buy-here-pay-here car lots. If you want to hang on to the little money you have, you need to steer clear. For more, read "5 businesses that rip off the poor."
Lower middle income: $20,000 to $40,000
Review the tips for those earning under $20,000, because they probably apply to you as well. Then consider the following advice to help you get by:
- Limit your overhead. If you want to have money enough to pay off debt, save for the future and still have a little fun today, it's important to limit your overhead. Keeping your "must-have" expenses -- the costs for shelter, transportation, food, insurance and minimum loan payments -- to 50% of your after-tax income isn't easy, but doing so can ensure you have money left over for other goals. For more details, read "The 50/30/20 budget fix."
- Save for retirement. Social Security will provide a good-sized chunk of your income in retirement, because the system is set up to replace more of a lower-income worker's earnings than those of a higher-earning worker. (Someone earning $20,000 will get Social Security benefits equal to nearly 70% of his or her working income in Social Security, while someone making $40,000 will get a benefit equal to about half of pre-retirement income.) But you'll still want to put something aside to prevent a big drop in income once you quit work. Take advantage of any available workplace retirement plans. If you don't have a plan at work, open an individual retirement account at a discount brokerage or mutual fund, and set up automatic transfers to fund it.
|Pre-retirement income||Social Security replacement ratio|
|Source: Aon Consulting, 2008|
- Set up savings buckets. Consider setting up separate savings accounts for irregular and nonmonthly expenses -- car repairs, holidays, vacations, property taxes, insurance payments. Online banks make this easy, since they typically don't have account minimums or monthly fees. You can set up automatic transfers so money is funneled into each account every payday. That way, the cash to cover bigger and unexpected expenses is there when you need it.
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I think these ideas sound pretty good. Unfortunately the folks who fit into the lower income brackets will most likely spend any money they are'nt forced to pay out for food and a roof over their heads. It's predictable that they will, and thus the poverty/lower income level existence will continue for them.
I do know of this because my parents and grandparents 'lived' this way and always were poor.
They had poor impulse-buying control. Exhisted and qualified for social welfare programs instituted in the 60's. They believed all the hype of the day.
I made other choices and choose to live frugally by most American's standards, but have no mortgage on my home, vehicle payments, loans, no debts at all. My retirement is set and I paid for my highschool tuition and college education myself with afterschool jobs.
If people want to make life better for themselves, they can. Not by depending on welfare,food stamps,SSI and handouts.
The best money saving tip would be to stay away from Bank of America. They will defraud you out of your money.
This mentioned some great points. I have been unemployed now for 3 months and it has been so hard on our family. Luckily I was never a huge spender so I have some savings that should last us a bit longer. For me I sat down with my husband and we went through expenses that were just erroneous and ridiculous. We came up with eating out, a phone land line, and just random other things that if you look at your credit card you are like OH MY OH MY!
My husband, me, and my 16 year old son all switched from our expensive cellphones to just as nice phones but a non-contract company. I cant speak to all companies but so far we are using this one called Tracfone and we are spending an average of 160 dollars a month. I mean its THAT much of a difference. They were able to work out a family bundle plan with us and were so considerate to our needs. Yes you wont have an iphone but they had other smart phones options. ( not for me.. for the boys!) But thank you for this article. Every penny counts.
I don't think I can trust that social security will be there when (if ever) I retire. Sorry I just can't bank on that alone. That money is going fast now.
A new car for someone in the $60K to $100K income bracket? I'm on the lower rung of that scale and I can't imagine tossing $20K of after tax income to that kind of depreciating asset! It takes a very long time to save $20K of after tax income! IMHO new cars should be looked at the next income bracket up, unless you have a valid business reason for owning a new car. I don't, so I buy used.
I am frugal with my money and I wisely invest my after tax income into useful upgrades in my house.
Really, Liz? Do you think the super-expensive financial planners are any better than putting your money into an index fund? How can a financial planner make sure you are "on track" for retirement if none of the tracks lead there (high inflation, low interest, volatile markets trending downward, etc)?
Total waste of money, I don't care what your income is. Fees like that are for suckers.
This was a GREAT course to take. Thank you my friend. I read the whole article. Here you have given some informative news. You have mentioned some great points to save money. Do not spend more than you earn. Always remain safe. Many families cannot maintain their demand for family members. The life becomes harder. Use your free time to make money. It’s effortless. Its peace of mind is priceless. <a href="http://tips4user.blogspot.com/">How to get tips</a>
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