Are you currently enrolled in your employer’s 401(k) program? If not, you should be. And you should also be contributing *at least* up to your company’s match. You know why? Because they’re giving you FREE MONEY!
That’s right my friends, no gimmicks, no ploys, no broken promises (like you get from the opposite sex) – just free money for doing something you should already be doing anyways: investing in your retirement.
The 401(k) is your best friend, and one of the easiest tools you can use to build up that nest egg. Before you can get started though, you’ve gotta hit up your company’s HR department and get a few facts in check:
- What percentage of your salary does your company “match?” Or in other words – how much FREE money will they give you just by contributing to your retirement account? If they say 3%, great! If it’s 6%, even better! What that means is that for every 3% or 6% of your salary you put away into your 401(k) yourself (something you SHOULD be doing anyways), your company will double it! Just like that. And the beauty of it all? It doesn’t require any extra work on your behalf! Once you get ‘er up and running, you can be as lazy as your good heart wants.
- How long do I have to wait until it’s fully “vested?” This shouldn’t stop you at all from contributing, but I do have to mention this as it’s an important variable here. All that “vesting” means is that there is a time frame as to when you can say that $xxx.xx amount of dollars they give you is 100% yours. It basically ties you to the company and makes sure you’re not just gonna take that money and run as soon as they give it to you (believe me, people have tried). If they say it’s 50% vested over 2 years, and 100% vested over 3, that means you’ll get to keep 50% of your free (matched) money after 2 years, and all of it after working there for 3 years. That part’s pretty $hitty, I’ll admit, but at least it’s still free. And, of course, you get to keep all of the money YOU invested no matter when you leave – it’s yours forever.
It’s also important to note that the more you contribute to your 401(k), the less taxes you have taken out of your paycheck! So not only are you getting all this free money, but you’re skirting the taxes on it too (at least for now – you’ll have to pay the taxes later when you’re old and wrinkly, but the more you accumulate the more it snowballs and gains all that compound interest). Let’s say the 6% you’re contributing comes out to $50 bucks a paycheck. Awesome. You’ve got $100 going to retirement! ($50 of your money, $50 of your company’s) Now let’s say you ignore me cuz “I don’t know what I’m talking about.” Well, not only will you NOT be getting that extra $50 for free, but you won’t even be getting the original $50 either! Instead it gets taxed just like the rest of your paycheck, and you’re now left with only $33 (based on a 35% tax bracket). Horrible!
So what’ll it be my friends? $33 now, or $100 later? If it’s not the simplest decision you’ve made today, I don’t know what else to tell you. Take a stroll down to human resources and make it happen. You might notice the difference in your paychecks at first, but I swear you’ll forget all about it in no time. And you can thank me by buying me a beer later 😉
Run your 401k through Personal Capital’s 401k Fee Analyzer!
Updated for 2015
I completely agree that those who have this benefit available should take advantage. Unfortunately, as James pointed out, many companies including those of almost everyone I know have eliminated the 401(k) match. It’s a bummer, and I hope that changes quickly as the economy starts to recover.
Which brings me to another point, since I now see the “other” side of running a company: there is no free lunch. The money to contribute to your 401(k) is coming from somewhere–whether that’s a lower salary, decreased benefits, or cutbacks on overhead, something has to fund your match. Unfortunately, it’s NOT “free money.”
But that makes me even more 100% FOR taking advantage of this. If you don’t, you’re missing out TWICE–once on the contribution, and once because you’re (in one way or another) paying for other people’s contributions!
Get on board with J. and get matching!
I never really thought about it that way sir, great points to keep in mind! You’ve proved me wrong and right at the same time 😉
As long as I don’t have to be as crazy as you, J., and do those insanely high percentages. 😉
I waited to start my 401(k), I wish I hadn’t but what can you do? I do have a Roth IRA that I’ve had for nearly a year longer than the 401(k), mostly because I didn’t know what the terms were. As soon as I learned it was a full 4% match and immediate vesting, it was a no brainer to sign up.
I’m hoping to find another job with similar 401(k) terms, but it’s not the easiest. So far, Starbucks is topping my list as a fall-back job with their killer benefits. 🙂
Haha…yes, I do tend to go overboard at times with it but only because it would be crazy not to 😉 And Starbucks is key for sure – actually one of my top 5 places to work one day! Whenever I figure out a way to earn enough to survive from blogging, I’ll be hitting it up for the benefits and to stay in front of people. Of course, that’s if they’d hire me with my A.D.D.. haha…
I bet with the right location you’d be busy enough to keep the short attention span in check. 🙂
It’s just an easy company to think of, they have tons of locations where we’re moving (19 that were hiring when I checked!) and doesn’t sound like it’d have the drawbacks of my current job that I don’t want to go back into. Oh, and the stellar benefits package. My co-worker is moving shortly after I am, and I think I partially convinced him to try and find a job with Starbucks too.
If you end up doing it, let me know! I questioned one of my fave baristas here in the city a few months back, but I always like hearing more insight and secrets as to what it’s REALLY like to work there 😉
Dead-on. I couldn’t agree more. It’s a shame that something so important and fundamental isn’t known by more folks. Why don’t they teach this in high-school to help prepare kids for a prosperous economic future?
Also, what’s your take on exceeding the 401(k) company match? I know there’s different arguments on this.
Cheers!
Matt
Thanks mate. You know, that’s def. a more tricky one. In the end, saving money is still saving money so it’s not that much of a deal breaker either way you go, but surely there’s pros and cons to investing in one spot over the next.
I usually say that maxing out a Roth IRA comes next after contributing up to your employer’s match via 401(k) first. You have a lot more options and say on *where* it goes (money markets, mutual funds, stocks, bonds, cds,etc) where as you’re limited to the funds that your 401k plan offers – and unfort. they’re not always the best for us.
I’ve written a post on it before if you want to check it out (401(k) vs. IRA – Which is Better For Your Extra Money?), but I think it comes down to personal preference when all is said and done. As long as you DO end up saving it somewhere, of course 😉 It’s easy to get paralyzed with all the options we have and end up spending it by accident instead.
Nice, easy-to-understand explanation, J. You know me, I’m already rockin’ the 401k…and Roth IRA but that’s a topic for a different post. 🙂
You are a king if you do both my friend, and I’ll happily see you on the beaches one day in the near future!
Agreed. I worked at a place where they offered a free match and I walked away with nearly $3k after just 18 months. It’s not money I can retire on, but I’ll take any free money I can stash away. Doing this before you’re 30 also increases the long-term gains doubling every 7 (ish) years.
For sure. That $3k will double & double & double over time even if you never added to it again! And I doubt you missed the deductions from your paycheck much, right?
I guess I can understand why an Untemplater might not realize that many companies are currently not offering or have withdrawn any 401k match contribution/benefit during the recession.
it’s true places are cutting back, but that doesn’t mean they’ll be gone forever – nor that it’s a bad idea to keep on investing. when my savings account cuts their % in half I don’t stop saving 😉
I personally just think too many people overlook a benefit that’s so incredibly easy to take advantage of. the more you drop in while you’re doing the “9-5,” the more freedom you have to live that untemplater life on your own terms.
great breakdown of the benefits of a 401k for the layman!!
Great! I’m glad it came out like that 🙂 I know it took me years to understand what it was about until someone shook me straight. Now I’ve been saving like a mother!