The Best 401(k) Advice You Can Get

money

Investing in your 401(k) is a great idea; you know this. It’s a wonderful way to save money and hopefully retire on time and with a nice little nest egg to your name so that you can enjoy the Golden years of your life. It’s not always easy to understand, though. When it comes to investing and contributing, some find it far easier than others. I remember when my husband and I both began to contribute to our 401(k) plans and how we worked so hard to figure out what we needed to do in order to make the most of our money.

The good news for us is that we were so young. We were 21 and 22 when we got married and that’s when it really hit us we needed to start making wise investments for our future. We came home from our honeymoon and moved into the house we built (I won’t even go into how that house was supposed to be completed six months prior to our wedding because it still irritates me even 12 years later) and then we began doing married people stuff. We got life insurance. We combined our car insurance policies. We created our first will. We decided to think retirement.

We couldn’t figure out what to save, though. We didn’t have many bills other than the usual monthly expenses. That’s when we made the decision to speak to a friend who is a financial advisor and ask him what he thought of our retirement plan as it pertained to our 401(k). He was straight forward and explained things quite well so that we still see things as he explained them and not even a bit differently.

Figure Out What You Need to Know

The most important thing to do when you are considering this plan is knowing the facts associated with your own 401(k). You need to know what your employer will contribute – if anything – and this includes their max and their percentage. For example, you might have an employer that is willing to contribute 50% of your contributions up to $3,000.

Why you need to know this is because it’s free money. Let me say that just one more time – FREE MONEY. Does that have your attention? If your employer is willing to match any percent of your contributions, you must know this and base your contributions off of this. So let’s say that your employer is working with the above mentioned scenario.

You want to max out that free money. Your employer is giving you half of what you contribute. That’s a lot of free money to take into consideration. So let’s see what you have to do. You need to take as much from them as possible, so you’ll want to contribute $6,000 per year in order to get the full $3,000 your employer will contribute to your fund.

What If You Can’t Afford That?

Let’s add a bit more to the above situation. Let’s say your annual income is $100,000. To contribute your $6,000 you are effectively lowering your income by that much, which is really not bad at all. However, you don’t think you can afford it after taxes and Social Security and insurance and all that fun stuff no one love to pay for.

Let’s start by breaking it down. Sometimes you see that number and it freaks you out because it’s a bit number. Allotting $6,000 per year out of your income to something else is expensive no matter how much you make. But if you break that down by 26 paychecks (which is pretty typical) it’s only $230.77 per check. Does that seem a bit more reasonable?

If you still don’t think that you can afford that after doing the math, why not find another way to pay for it? Our financial advisor told us that many of his clients will find another way to afford to pay for their contributions such as eating at home more often, not drinking during the week so that they can save money on wine, or even cutting their cable bill out of their life. At the end of the day, that’s a bit of money you can find you’ll enjoy more in your retirement fund than in your cable watching habit.

If you have 30 more years to retirement in this situation, you could max out your 401(k) and earn $90,000. Free; you’re earning this money from your employer free of charge. You’re not working for it. You are not doing anything for it. You are getting almost six figures free money without doing anything more than maxing out your retirement fund at work so that you can obtain that free money your employer is offering. Let me tell you what we learned; you can’t ignore free money like that.

Photo by Getty Images