Rein in Spending to Build A Cushion for Emergencies

The biggest challenge facing lower-income Americans is that they don't make enough money. That statement may seem so blindingly obvious as to be unhelpful, but financial planners say there are ways to boost the finances of those with a family income of $25,700 a year -- short of helping them find more lucrative employment.

By some measures, poor families seem to be less inclined to use debt irresponsibly than most Americans. About 43 percent of low-income families carried a credit card balance, compared with 46 percent of all families. It may be in part because they have worse credit ratings and therefore fewer are offered credit cards. "But for whatever reason, the lower-income bracket seem to be more debt-responsible than your median family," said Bard Malovany of Sagemark Consulting.

Among the advice the planners had for the low-income family: Prepare a detailed plan to rein in spending and attempt to use it to build a cash cushion, so when an unexpected expense rolls around, there will be less of a need to turn to a high-interest-rate credit card.

There is some good news for families near the bottom in income; of those who had a retirement plan in 2004, the median value had increased, to $10,000 from $8,500 in 2001.

Some financial advisers said too many poor families are investing through cash value life insurance plans. About 19 percent had such a plan, compared with only 7.6 percent who owned a mutual fund. Although the median value of the life insurance plans was small -- $3,900 -- that money might be better placed in more liquid investments, such as helping bolster their cash savings, said Charles Berk of UBS Financial Services Inc.

Some financial advisers said families, whether poor or rich, should generally buy term life insurance to protect themselves against lost income from a family member's death. It is easy to do price comparisons on such plans to get the best deal.

Cash value life insurance, by contrast, contains elements of both an investment plan and conventional insurance. Planners said it can sometimes be more difficult to determine which fees and commissions are involved.