Financial Advice for Households Making Under $75,000

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Financial Wisdom From The Experts

The majority of households in the U.S. bring in less than $75,000 per year, and only a little more than half of them have retirement plans. While we've found that financial advisors can be reluctant to work with those who fall in this income bracket, we were able to speak with several of them who gave us the rundown of what it exactly means to be in the middle class and how these households can start planning for their nest eggs.

According to the U.S. Census Bureau, the median household income in the country was $59,039 in 2016Nearly 60 percent of U.S. households make roughly $75,000 or less.

Pew Research Center defines the middle class as "adults whose annual household income is two-thirds to double the national median." In 2014, that meant that families of three who brought in between $42,000 to $126,000 fell into the middle-class category.

Know Your Income Bracket

However, there seems to be a difference in numbers between the ones who believe they're in the middle-class and those that actually fall into the category. According to a 2017 Northwestern Mutual survey (pdf), the 70 percent who perceived themselves as middle class was actually a far greater percentage than the 50 percent who actually made up the class. But even the number of middle-class households has fallen from 61 percent in 1971.

When we reached out to financial advisors and asked for tips and advice for those making $75,000 or less, the answer from some of the biggest firms in the country was the same: "No, thank you." They didn't want to give us tips, but they also made clear that they typically work with clients in higher income brackets. As noted by Greg McBride, chief analyst at financial site Bankrate, households with incomes of less than $75,000 feel less comfortable tossing money at advisors or into retirement plans. Rebekah Barsch, vice president of planning at Northwestern Mutual, points out that of those who perceive themselves as middle-class, with household incomes ranging from $50,000 to $120,000, just 43 percent work with an advisor and 51 percent have retirement plans.

Increase Savings and Lower Debt

Just 58 percent of Americans report they have more money in emergency savings accounts than they do in credit card debt, according to Bankrate, while the percentage of Americans with more credit card debt sits at 21 percent. Households that make $30,000 to $50,000 a year are more likely than any other group to have neither credit card debt nor emergency savings.

"Too many Americans haven't right-sized their savings relative to debt, and even those that have made progress still find themselves with an inadequate amount of savings," says Bankrate chief financial analyst Greg McBride.

In general, debt has increased everywhere. Mortgage debt ($8.88 trillion at the end of 2017), student loan debt ($1.38 trillion), auto loan debt ($1.22 trillion), and credit card debt ($834 billion) all rose nationally last year, according to the Federal Reserve Bank of New York. A 2016-to-2017 survey by the Kaiser Family Foundation health care group found that 29 percent of Americans have problems paying medical bills and 37 percent have increased credit card debt to pay them.

Financial site NerdWallet just completed its 2017 annual survey of household debt and discovered that the average household with revolving credit card debt has a balance of nearly $6,081 a year and pays more than $900 in interest annually. That hits middle- to lower-income households disproportionately hard.

According to a similar NerdWallet household-debt survey completed in 2015, households that bring in more than $157,479 per year pay almost four times more in credit card interest than households that make less than $21,432. However, when a household making $150,000 a year has $10,036 in credit card debt, that's less than 7 percent of its income. Unfortunately, when a person who makes $20,000 a year owes $3,611 in credit card debt, that's 18 percent of their annual income. Meanwhile, households led by self-employed individuals spend $1,194 in credit card interest annually, while heads of households who work for someone else pay only $843 to finance their credit card debt each year.

"Finding a way to put money toward paying off debt, especially high-interest debt, is the best way to free yourself from the vise grip debt can have on your budget," says Kimberly Palmer, NerdWallet's credit card expert.

She suggests taking small steps, such as making sure savings are in high-yield accounts, renegotiating monthly bills, and transferring balances to zero percent-interest credit cards that can be paid off more quickly. Palmer adds that using a cash-back credit card can free up cash that can be put toward debt payments.

Reduce Healthcare Debt and Plan for the Unexpected

While you can comb through your transactions over the last few months to see what items you can cut, such as subscriptions, restaurant, and entertainment expenses, getting medical expenses off a card can help as well. Palmer suggests talking to your doctor or hospital to see if you can arrange an interest-free payment plan with them. Otherwise, try taking advantage of tax-free flexible spending arrangements or health savings accounts through your employer to pay off medical expenses.

Even if you're perfectly healthy, an emergency can take a considerable toll. In a Bankrate survey, just 39 percent of Americans had enough savings to cover a $1,000 emergency room visit or car repair. Another 36 percent would need to borrow the money to cover that expense. While 62 percent of households that make $75,000 or more would dip into savings to cover those expenses, the lowest income households, who have an annual income under $3,000, were twice as likely to to use a credit card, personal loan, or loan from family and friends as they were to use savings. Considering that, during the past year, more than one-third of American households reported that they have had a major unexpected expense, with 30 percent of them paying $5,000 or more, these loans can get costly.

"Build your savings cushion by having a regular direct deposit into a dedicated savings account," McBride says. "Even when unplanned expenses arise, you're only one paycheck away from beginning to replenish that savings cushion."

Look for Ways to Save During Tax Season

With median annual household income growing 20 percent over the past decade as the cost of living has increased 18 percent (though far more steeply for medical care, food, and housing), according to NerdWallet's survey, it helps to take breaks where you can get them. Around tax season, there are several ways that households making less than $75,000 can lessen the cost a bit. The American Opportunity Tax Credit and Lifetime Learning Credit both knock thousands of dollars off of the cost of education, while the child and dependent care credits can cut the cost of daily care by up to $6,000. The health-insurance premium credit, savers credit, job search deductions, and even car expenses can also help cut the tax bill.

Plan for the Long Term

If you've already sought out those tax savings, or if you've managed to pay down debt and have some money left over, our advisors suggest creating an emergency fund and then saving for retirement. That last objective isn't as impossible as it sounds, either. As NerdWallet points out, if someone with a median income of $59,039 contributes just the 3 percent their employer will match, it'll add up to $623,000 after 37 years, given a 6 percent rate of return on investments. If the same worker bumps that contribution to 8 percent, however, that retirement savings will add up to $1.14 million. Your money will perform far better in a 401(k) or IRA than it will as debt on a credit card or car loan.

"While it's good to see Americans feeling better about their debt, I'm worried that some people are getting carried away," says Matt Schulz, senior industry analyst for CreditCards.com. "It seems like a lot of people are forgetting the painful lessons of the Great Recession."

Most people only plan their finances for the short-term, but more and more are taking a longer-term perspective, reveals a 2015 poll from deVere Group, one of the world's largest independent financial advisory organizations. The group asked their potential clients, whom at the time of the poll did not work with an independent financial advisor, "Do you plan your finances one year ahead, one to three years ahead, or three years or more ahead?" Seventy-one percent of the group responded with the first option. When the same poll was carried out two years prior, 82 percent of respondents claimed to only plan their finances one year ahead.

The participants in the poll consisted of 648 people, aged between 25 and 70, and ranging from middle-income earners to high-net-worth individuals. They were from countries including the U.S., U.K., Spain, Australia, France, South Africa, and the United Arab Emirates.

Create a Roadmap of Financial Objectives

While Nigel Green, deVere Group CEO and founder, found it "encouraging" that the poll showed that the number of people interested in planning for their financial futures was growing, he also thought it was "alarming" that seven out of 10, across the board, weren't working with a financial advisor and were only thinking about their short-term finances.

"It is almost universally recognized that longer-term financial planning makes it easier to reach your financial objectives, which for most of us is financial security, because you have more time and considerably more opportunities," Green says. With a longer-term perspective, your plan acts as a roadmap for the continual growth and development of your financial affairs."

Don't Wait To Get Started

He adds that it may appear that planning for the longer-term is more difficult than planning for the short-term, but calls that a "myth." "The difficult part is starting to plan long-term," Green says. "But procrastination will leave you in limbo and is likely to cost you dearly."

Green believes the best thing you can do is start planning early, and not let worrying about not having the perfect long-term plan in place hold you back from making a move now. You can always make adjustments to your plan in the future.

Now is the most important time for long-term financial planning, he says. Governments are increasingly cutting age-related benefits, which means we'll have to be more "self-reliant during retirement in the future," according to Green. There's also the argument that we are all living longer, so our dollar will have be able to stretch much more than it ever has in the past.

"If you're serious about reaching your big, life-enhancing financial objectives, you must think and plan with a perspective that's longer than 12 months," Green says.

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