Less room for error when trying to budget on a smaller income; Cushion: Look for small cuts that can add up, and take advantage of tax breaks.; DOLLAR & SENSE


Amid the torrent of magazine articles, Web sites and television programs advising the wealthy and the middle class on how to invest and manage their money, one important group of people is routinely ignored -- the millions of poor and lower-middle-income Americans.

If anything, money management is a trickier, higher-stakes proposition for people of modest means, since there is little room for error. Consequently, drawing up a realistic but strict budget becomes especially crucial.

"If you're living on $15,000 a year instead of $150,000 a year, the budgeting is more important because each decision is a bigger piece of the pie. You have to be a lot more prudent with your decisions," said Carol Katz, director of taxation at Leonard J. Miller and Associates, a Baltimore accounting and consulting firm.

Taking notice of what you're spending your money on each day can help you spot ways to save. "Even if you go to 7-11 and buy a cup of coffee, every cent you spend can make a difference. Track your spending, then you can work from there," said Connie Hoyack of the Maryland Cooperative Extension Office in Calvert County.

The little daily expenses can add up. To take Hoyack's coffee example, say you spend a buck each weekday morning to buy a cup. That's about $20 each month, $240 per year.

The first priority of the budget, Katz said, should be setting up a rainy day savings program, money you can draw on in case you lose your job, your work hours get cut or some emergency makes a demand on your finances.

Personal finance books often advise that this fund should ultimately equal at least three months' worth of living expenses. For low-income people who are just trying to keep themselves and their families fed and sheltered month to month, this goal is not always realistic. Katz said people in this situation should aim to build up a savings account that could tide them over for at least a few weeks.

Once this is achieved, Katz said, a longer-term savings plan should be established. Again, setting aside money for the future might seem like a daunting prospect when your financial needs are so pressing, but just as that daily cup of coffee can add up over time, a little money saved each month can build interest and give you a financial cushion.

Katz said some options to consider include $25 monthly Savings Bonds or even mutual funds that require relatively small amounts of money -- $25 or $50 -- for participation. Your savings campaign might be helped if you arrange for the money to be taken out of your pay automatically each month. This makes it a bit easier to stick with your long-term planning program; it's easy for people at any income level to be tempted to spend now.

Another way to give yourself a bit more financial room is to make the most of the various tax credits, deductions and other provisions that are intended for those with lower incomes. "It becomes all the more important to watch the tax advantages, because it's a bigger part of your income," Katz said.

One example of a tax measure that helps low-income workers is the Earned Income Tax Credit, or EITC. This provision reduces the taxes of people who are employed and earn less than a designated income threshold -- from $10,030 for people who have no children to $30,095 for parents of two or more. By filling out a W-5 form, a taxpayer can get payments in advance.

An additional resource is the wide variety of public assistance and charitable programs that are aimed at boosting financial independence. These range from state welfare programs to free or low-cost pro bono services offered by attorneys and tax specialists.

Such assistance can be extremely useful; for example, even if you don't have much money, it is very important that you arrange for a valid will that ensures that certain basic matters -- such as guardianship of your children -- are taken care of. A lawyer can help you with this, and your local bar association or legal aid office can put you in touch with one.

One way for a person of low income to bolster his or her long-term earning capacity is to invest in education or job-skill training. Especially in the current labor market, even a seemingly modest skill can lead to a job that can improve your situation. "Even if it's housecleaning, you can move into hotel work," Hoyack said.

A good source of financial advice is the Maryland Cooperative Extension Service. For the Baltimore City office, call 410-396-1881. In Baltimore County, call 410-666-1022. Anne Arundel County: 410-222-6757. Carroll County: 410-386-2760. Harford County: 410-638-3255. Howard County: 410-313-2707.

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