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When good money advice is bad for you

Advice for saving should depend on income level;

Advice for saving should depend on income level; even a small emergency fund will do for a start. Credit: Getty Images / iStockphoto

Discussing economic class is tricky in America, but the working and middle classes face vastly different financial challenges than upper-income families, and the gaps are growing wider.

Good money advice for high earners could be lousy for low earners, and vice versa.

For example, certified financial planners recommend saving a three-month emergency fund before tackling other money goals.

That advice can make sense for affluent families since high earners often have enough discretionary income to create an emergency fund quickly.

For families living paycheck to paycheck, the same advice could be an expensive mistake.

A middle-income family might require two years to save the equivalent of three months’ worth of expenses. That could mean passing up company matches in 401(k)s, losing tax breaks for retirement plan contributions and paying exorbitant interest rates on credit cards and other debt for those two years.

Everyone needs an emergency fund. But even a small one — $500 to $1,000 — will do for a start.

Building up a three-month fund should come after retirement savings is on track and debt with high interest rates has been paid off.

Education debt is another example where the best advice depends on how well you’re fixed.

The lower your income and the less wealth you have, the less of a rush you should be in to pay off student loan debt. Extra money you might send to lenders likely would be better used to bolster your financial cushion.

Yes, paying loans off early reduces how much interest you pay, but you can’t get that money back if you lose your job or face other financial setbacks.

Less affluent borrowers also shouldn’t refinance federal student loans, which have consumer protections and flexible repayment plans, into potentially lower-interest rate private loans that lack these options.

Only those who are unlikely to need forbearance and deferral (high earners with plenty of savings) should consider refinancing or quickly paying off student loans.

Which retirement account to pick?

If you have a 401(k) at work, it makes sense to contribute enough to get the full match. But if you can contribute more, the Roth might be the better option if your income is erratic. Roths allow you to withdraw the amount you’ve contributed at any time without triggering income taxes and penalties. Ideally, you would leave the money alone to grow, but you won’t be punished if you can’t.

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