I’m telling you right now – the best thing you can do for yourself and your future is sign up with your company’s 401(k) plan.
Most companies, like my husband’s, offer a pretty nice match up to a certain percentage of what you put in.
Perhaps you not understand what a match is. Does a 401(k) sounds super confusing and the unknown is scary?
Do you want to save and haven’t been able to?
I’m going to break this down.
What is a Matching Contribution?
First, go ahead and get the paperwork to sign up for your 401(k) plan.
Let’s say you make $35,000 per year. That’s $16.83 per hour or $673.08 per week.
You don’t want to make the wrong decision and lose the hard earned money that you are barely considering putting into an account that you know nothing about. However, you bite the bullet and start filling out the paperwork.
You decide to contribute 2% to test it out. 2% would be $13.46 per week
(Based on $35,000 per year)
Oh, but your company matches 100% of the first 4% of your contribution.
What does this mean?
Well, it means that if you contribute 8%, your company will match the maximum they are willing to, which is 4%. (Note that each company is different. Read your packet.)
If you contribute 10%, your company said they would only match up to the first 4%, so now you’re putting in your 10% and your company is still putting in 4%. Pretty cool that you are getting 14% when in reality you are only having 10% come out of your paycheck.
To get the maximum amount of “free” money in our scenario, you would need to contribute at least 4% so the company will match their maximum 4%. You’re getting 8% into your 401(k) total, but only 4% is coming out of your paycheck.
What Matching Does For You
Now let’s go back to the scenario listed above. You decided to contribute 2% to test it out. So you are going to put in 2%.
Your company matches up to 4%, but you are putting in less. That’s totally fine – Congrats to you for making the first step! So while you’re putting in your 2%, your company is matching it with 2%. You are doubling your money!
Cha-ching!
So instead of $13.46 per week going into your 401(k), you’ve now got $26.92 going in there. What other investment do you know of that immediately doubles your money??
$26.92 x 52 weeks in a year = You now have $1,400 at the end of the year in your 401(k) plan, not including any market fluctuations.
My immediate suggestion would be to suck it up and put in whatever amount you need to in order to get the maximum “free” money from your employer. However, I sucked with money more than almost anyone in my younger years and I can completely understand how hard it is to take the first steps. I bet when you see the results, you’ll change your mind.
Using Your 401(k) for Savings
The 401(k) plan at the company I work for is the worst I have seen. The matching contribution my employer will contribute is only up to $500 per year. It’s not a percentage. So I could put in $10,000 and my company still only matches $500.
Did that make me stop contributing more than the minimum? Heck no.
Perhaps I should have put that money somewhere else. I’m not a financial advisor. I am a woman that has experienced many money mistakes in my lifetime. I’ve lived paycheck to paycheck.
I can relate to having high childcare or being in-between jobs or a partner being unemployed. I can also admit that I had poor money management. My priorities were wherever I wanted them to be on that particular day.
I was not money disciplined until a much later age in life. For whatever reason (maybe my 20 year old self is smarter than I give her credit for), I put in 1%-10% into my 401(k) each year when I was in my twenties. I kept playing with that contribution number up and down as my finances improved or were strained. I was horrible at saving.
My childcare costs were higher than my monthly house payment.
When an emergency hit twice, I was able to take out a loan of $10,000 from my 401(k).
Lots of financial savvy people will think I’m crazy saying I took out a 401(k) loan for an emergency. Those that have lived paycheck to paycheck and aren’t savers like I was, are probably more open to the idea. The thing is, I wasn’t finding some cash advance place (ugh) or calling all my family members begging for money.
I took care of it myself and I paid the loan back to myself.
Tax Free 401(k) Contributions
I don’t want to leave out the fact that your money goes into your 401(k) pre-tax.
That $13.46 you are contributing every week does not have federal income taxes taken out. In other words, the money is not taxed at the time of investment.
So even though you are putting $13.46 (plus employer match!) into your 401(k) every week, your paycheck is very unlikely not to drop by $13.46.
Investing Choices
Could you put your money elsewhere? Yes. When you start getting to the point where you are putting in enough to receive the maximum employer match, you may be awesome enough to start going elsewhere to invest.
This post is geared toward the 20 year old me that refused to believe I could cut anything in my budget and invest money anywhere. There’s something magical about the money immediately coming out of your check and going directly into the 401(k) account. You don’t have to do anything. You don’t have to transfer or think about it. I often forget it’s even coming out.
Every few months I think about it and go in and look at the balance and whoa….It’s grown!
Automatic Increases To Your 401(k)
Most plans also offer an automatic increase to your contribution amount.
Say you are putting in 2% and you know that you receive an increase around January every year. You can go to your plan’s website and ask that it auto-increases your contribution amount by 1% every year in January.
Maybe you received a 4% increase. Now it’s 3% because you automatically took 1% of that and put it into your 401(k). If you would have received 4%, you’d be receiving an additional $26.92 each week. Now that you’re putting 1% more (yay!) into your 401(k), you’re now receiving an additional $20.19. Did that hurt?
This was a really high level overview and I’m open to answering any questions you may have.
Key Takeaways
If you’re living paycheck to paycheck, find a way to put that 1% minimum in your work sponsored 401(k). I’ve recommended our crappy 401(k) at my job to everyone I work with and not a single person has regretted it. Someone in our office actually just took out a loan to buy a new car because hers died and she needed at least a down payment for something new or she wouldn’t have a job because she couldn’t get to work.
Some have never touched the money in there and are super stoked every time they look into their account and see it growing by more than what they are putting in.
There are so many more things to talk about here – like compound interest that you’ll earn over time or what funds to put your initial investment into. We will get there, I promise. In the meantime, you can reach out to me for specific questions and I would love to help you. 🙂
Putting in 1% is such a HUGE step for someone who isn’t a saver. If you’re doing this – I am super proud of you and don’t let anyone tell you otherwise!
Congratulations on your first step!
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