Financial advice is rarely one-size-fits all: If you read financial blogs regularly, you’ve probably seen your share of tips that just don’t apply to your situation. To a family of four living on an income of $20,000 a year, the idea of starting an “emergency fund” with six months’ worth of living expenses probably sounds close to impossible. And if you’re a single person pulling in $65,000 a year, you might be looking for some slightly more complex advice about retirement and investing.
As a guy who gives debt and finance advice for a living, I’ve worked with people from a wide variety of income levels. And while it’s true that having a bit more money can make it easier to do things like, say, save for retirement or cope with unplanned expenses, it’s also true that each income level comes with its own unique set of challenges and priorities.
That’s why I’ve decided to focus this month’s blog on income-specific financial advice – whatever your household income, you’re sure to find a few helpful hints.
$20,000 and Under
Households living on an income of $20,000 or less per year have less of a “cushion” when it comes to extra money – and that means it’s critical that folks in this bracket make the most of what they have. People living on less than $20k a year should focus on things that will help them keep more of the money they earn and stay out of debt.
Specifically, I’d recommend that folks in this category:
- Avoid predatory businesses. That means things like payday loans or “rent-to-own” stores. If you find yourself in a situation where you’re having trouble paying bills, try asking your employer for an advance or seeking financial assistance through a not-for-profit organization, like a church or community group – payday loans are notorious for ultra-high-interest loans, and most people who do business with them end up in a never-ending cycle of debt. And, no matter how great they sound in commercials, rent-to-own stores are never a good idea.
- Try to put at least $500 in savings. Even if you can only afford to save $20 at a time, that money will add up and, eventually, make a big difference. Having an extra $500 in the bank can mean that you have the extra cash to deal with unexpected expenses. And, having extra money in the bank means that you’re less likely to be overdrawn – which can be a costly error.
- Check out a few tax breaks. When you did your income taxes this year, did you take advantage of the Earned Income Tax Credit (EITC) and/or the Savers Credit? Both of these tax breaks are designed to help low-to-middle-income folks save hundreds – or even thousands – a year. Not sure if you qualify? The IRS’ website has helpful information about how to qualify for the EITC and the Savers Credit (also called the Retirement Savings Contribution Credit).
$20,000 to $40,000
All of my suggestions for folks in the under-$20,000 bracket apply to people in this bracket: Avoid payday loans, take advantage of tax breaks, and try to keep at least an extra $500 in the bank at all times. But people in this income bracket have a little more money to work with, so I have a couple of extra recommendations for them:
- Try to keep your living expenses to 50% of your income. I know, that’s not easy — but it’s a good goal to aim for. If you can keep the necessities — housing, transportation, food, etc. – to around half of your monthly income, you can use the rest for savings – and even a little fun, like the occasional movie or a nice dinner.
- Start a retirement fund. Even if you only save a small amount each month, it’s a good idea to put something away. Open a separate savings account (one that’s not connected to your checking or “emergency” savings) and put away what you can. To make saving easier, consider setting up an automatic transfer of, say $20 a paycheck. Chances are, you won’t even miss the extra money.
$40,000 to $60,000
While folks in the $40 to $60k bracket have a bit more financial freedom, that freedom comes with a price: According to a recent Federal Reserve Survey, middle-income people are also the most prone to getting themselves into serious credit card debt. If you’re in this bracket, try to keep living expenses low and keep saving for retirement. Also:
- Don’t use plastic. If you have credit card debt, pay it off. And once you do, stop using it. If you must use it, pay the balance off – in full – every month.
- Start an emergency fund. For folks in this income bracket, I recommend an emergency fund of around three (or even six) months’ worth of living expenses. It might take a while, but you never know when that extra cash might come in handy.
$60,000 and up
Just like the middle-income folks, I’d recommend that high-income households avoid credit card debt, save for retirement, and have an emergency fund set aside. In addition, people in higher income brackets should focus on protecting their money – now and in the future:
- Have kids? Start a college fund. Kids from higher-income families aren’t likely to get much in the way of financial aid for college. By starting a college fund early, you can help your kids avoid crushing student loan debt.
- Hire professionals: If your household income is on the high side, I highly recommend that you get help with your finances – professional tax preparers and financial planners can help you make the most of your money.
- Spend less than you make. There’s a common misconception out there that folks with very high incomes are wealthy – but that’s not always the case. Often, the people in this income bracket feel the need to “keep up” with their high-earning peers – and this can lead to overspending, which in turn leads to a situation where you have a high income but no real wealth. If you want to make the most of a high income, you have to spend less. Live in a modest home. Don’t drive a fancy car. Pay cash for luxury items. Save, save, save. Make sense?
There you have it – solid financial advice for every income. What do you think? Do you have any favorite financial tips? How do you make your family’s income work for you? Leave me a comment below!