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.
Middle income: $40,000 to $60,000
You're smack in the middle of U.S. incomes, but the tips that apply to the folks in the $20,000 to $40,000 bracket also apply to you. Here are the additional steps you need to take:
- Nuke your credit card debt. The percentage of households with credit card debt really starts to climb as income rises. More than half (54.9%) of middle-income households had credit card debt, according to the Federal Reserve's latest Survey of Consumer Finances, compared with 25.7% in the lowest quintile of income and 39.4% of those in the second-lowest quintile. Credit card debt is a cancer on your finances, because you're paying interest on stuff that has little or no current value. Getting in the habit of paying off your credit cards in full every month will save you a ton of money and help you reduce your risk of bankruptcy. Read "A debt payoff plan that works" for more.
- Step up your retirement savings. You should be getting your full company 401k match, if a match is offered. Keep boosting your retirement contributions by 1% a year until you're saving at least 10% of your income (15% is even better). The more you save now, the more options you'll have later.
- Boost your emergency fund. Once you're on track for retirement and your credit card debt is paid off, start funneling the money you once dedicated to debt into your emergency savings account. Accumulating an emergency fund equal to three months' worth of expenses could take you a few years, but that cash can help you sleep better at night.
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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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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