It’s free money and it took me a year to decide to grab it!
Have you ever contributed to a fundraiser when they’ve said your donation will be matched? That means, if you donate twenty dollars, someone else will donate twenty dollars on your behalf making your complete donation forty dollars. Those are the best times to donate because your money grows.
That’s why I don’t understand why of the 50% of us that have access to a 401K plan only 30% of us are using them. Why? But then I look at myself and I’ve had access to a 401K for over a year and I just joined. It took me a year to do something that is a no-brainer.
Reason’s Joining a 401K is a no-brainer
Why do I say its a no-brainer? Let’s consider these:
- It’s free money! Your employer has said “I’ll help you with your retirement investment, but you have to do your part. Whatever you contribute up to ___% I will match. Your employer wants to give you extra money because you’re making an effort.
- It’s easy money! You don’t have to think about your 401K contributions and when to sent them. All you need to do is start the process, pick your investments and live your life. It’s all done automatically with input from you once a year.
- It’s smart! Having a 401K that grows in the background is a smart way to invest in your future automatically. In his book The Automatic Millionaire David Bach talks about how you have to pay yourself first automatically before you pay anyone else. It’s not about having tons of money, it’s about investing it automatically & regularly.
- Tax Breaks! Investing in a 401K is a way to alleviate your tax burden because the money you invest is tax free. You’re only taxed when you take the money out, and that may mean you’re taxed at a lower rate later when you’re in a lower tax bracket.
Right now, according to AnnuityDigest, 80% of these tax breaks goes to the top 20% of the population. . . let that sink in. . . a tax break that many can get, but only 7% goes to the bottom 60% of the population. The rich get richer because they continue to invest in themselves and get tax break associated with their investments. . . we can too!
Reasons we don’t join
With all this free money sitting around, why aren’t 100% of the people eligible for 401K programs, not taking advantage of the free money?
I can’t speak for everyone, but I can speak for myself:
- It seems like a hassle. As silly as it sounds it seems like a hassle to have to think of one more thing to get done in your day, week or life.
- Thinking about retirement is scary. We all like to think that we’re going to be young forever. Why do we need to think about retirement when we’ll live forever? As irrational as it seems, we all think it. We believe if we don’t think about it, we won’t get old. Think again.
- I can’t afford it. Using the word “investing” always elicits a feeling of “oh my gosh, I don’t think I can afford to invest.” We think we don’t have the money to invest now, maybe next month, next week or next year. Right now we have too many bills to catch up on, we can’t send any to an investment.
There are other reason that aren’t mine but that I’ve heard or seen such as:
- I’d rather give my money away
- I’m making tons of money, I don’t need to worry about that
- We’re rich, I don’t need to worry about that
- I’m self-employed I don’t have access
- I don’t want to lose money
There are counter arguments for all these scenarios which boil down to, “you can’t afford not to invest in your future while you can.”
Why I invested in my 401K
So I come to the place where I invested in my 401K this week because:
I’m young, but I’m also almost 50! I have two young kids and the free money is on the table but I’m letting it sit there. It’s not very smart or kind not to have some sort of safety net so your kids won’t have to support you in retirement.
The amount I would be investing I’d never see. I calculated that if I invested up to the amount my company will match (I wouldn’t go above that except to use another vehicle) it would amount to such a minimal amount we wouldn’t even feel it’s affects. Do you want to know how little it would be? Let’s take an example: You’re making $62K a year, your investment percentage is 5%, which is the maximum your company will match. That means you’re investing $3,100 a year ($6,200 with your company match). It breaks down to $258 a month. There are ways to adjust so the $258 won’t be missed.
If that seems like more than you can handle, here’s another way to do it. Start as soon as you can with 1% then allow your investments to grow by 1% a year. What happens then is any raises you get will offset the investment amount and you’ll never feel the pinch.
We have a lot of things we’d like to do now and later in life. If we want to live our preferred lifestyle, we’ll need to have enough squirreled away to draw from. I’m not getting any younger (although I still feel 35) and I don’t want to look back with regrets.
It took me ten minutes to start the process of investing in my 401K plan. No hassle at all!
What to consider / Action Steps
It’s time! It’s time for you to get a handle on your financial situation and think about how the decisions you make now will affect your future. The future is formed in this moment.
- Find out about your companies 401K plan
- Start your investment right away
- Invest up to the amount your company will match (invest in other things with extra money)
- Be aware of the time it takes to be fully vested. That means, for the first year, if you are no longer working a the company, only the amount you put in will go to you, but if you stay for 5 years, both your investment and the companies investment will go with you if you leave.
- If you change jobs you can: 1) Rollover your current investment to your new company; 2) Rollover your investment to a private IRA account; 3) Liquidate your funds but get a hefty tax penalty.
It’s free money, start investing then do more research if you’d like. If you research you can find all kinds of reasons why you should or shouldn’t invest in your 401K. Decide what’s best for you, but in the meantime, start your investments then educate yourself. If you find it’s not for you, roll it over to an IRA and keep moving.
In the end it’s your money and it’s about getting into the habit of paying yourself first automatically. Start paying yourself on a regular basis. It’s important for you and your children.