Lately it has occurred to me how much everything costs around me; bills, rent, student loans, food, GAS! After graduating in May and finally being “set free†by my parents, the reality is very clear: I need to start budgeting more efficiently!! Although Geezeo has really helped me organize my budget, I need to start putting my goals into action…
However, when talking to my mum in the car the other day…she mentions that I really need to consider putting money into a 401(k) if my company offers it. I immediately turn to her and say, “Really mum, I’m worried enough about getting by with rent and everything else, and now you want me to put part of my pay check into a 401(k) too!?†But she’s right (per usual)…although I’m only 22 years old, saving for the future and retirement should already be part of my life.
A 401(k) is one of the most popular saving methods for retirement that is used today. However, there are many companies and employees that do not use these benefits to their greatest potential.
Why a 401(k) versus some other retirement saving methods?
1.) When you start your 401(k), you can decide how much money you are taking out of your pay check each month. Even taking $20 out each month would be beneficial to you in the long-run! Many times however, there is a cap on how much money you can contribute to your 401(k) each year.
2.) The money that goes into your 401(k) comes out BEFORE taxes are deducted from your salary. This is great…nobody really likes taxes right?!
3.) Many employers will even match what you put into your 401(k)…up to a certain amount of course; it all depends on the company.
Although this type of retirement plan sounds great, according to Lauren Tara LaCapra from TheStreet.com, there are also 5 Mistakes to Avoid in Your 401(k). These avoidable mistakes are can limit how much you actually benefit from saving with a 401(k).
Many companies will help you when it comes to setting up your plan and doing what is best for you. Remember, a 401(k) is a long-term investment…once you start putting money into the account you should leave it there, otherwise there are taxes and fees that you won’t want to pay!
Even at age 22, a 401(k) sounds like a nice little plan that I should seriously consider. Although kids and the future still seems far off, I’m sure it will happen much more quickly than I could imagine and when it does, I want to be prepared. After watching my parents celebrate when I graduated from Boston University (tuition being around $47,000) I realize how important money for the future will be, especially with the rise in tuitions (and gas prices for that matter)!!
Photo: Darren Hester
June 25th, 2008 at 6:38 pm
One caution about 401k’s. Many people think there are no fees but often the fees are really high…and hidden. And fees can really hurt you. Look at the chart here (scroll down):
http://www.saveyournestegg.com/scam.html
Here’s an article about 401k fees:
http://money.cnn.com/2007/03/06/pf/retirement/401k_fees/index.htm
And, this:
http://www.youtube.com/watch?v=LjhJXsj7FxQ
Since it’s really hard to find out what fees you pay the only suggestion I have is to ask your plan administrator. Even they may not know. Here’s help for them:
http://www.401khelpcenter.com/401k/uncovering_hidden_fees.html
Also, beware a practice called ‘revenue sharing’. These are kickbacks paid for offering funds and those kickbacks impact your bottom line:
http://www.fool.com/investing/brokerage/2006/03/17/beware-of-revenue-sharing.aspx
Revenue sharing also creates a conflict of interest because you’ll be offered the funds that pay the kickback and those funds may well not be the best funds for you.
Also, does your 401k hold low-cost index funds? That’s really the best way to go since, over time, index funds outperform most (more expensive) actively managed funds.
What to do if your 401k has lots of fees and no low-cost index funds? You might consider putting in just up to the employer matching and then starting a ROTH IRA. And, if you leave your job, roll the 401k over to an IRA at a place like Vanguard. You’ll greatly increase your fund selection and you can dump the more expensive funds for lower cost funds.
My website shows how to set up a good asset allocation and gives general investing principles.
http://www.saveyournestegg.com/diy.html
One last thing…the sooner you start investing the better but make sure you have an emergency fund in place. Do not invest money that you might need in the next 1 – 3 years in stock funds/in a 401k. If you don’t start a 401k this year that’s OK. Make it a goal you work towards to start contributions as soon as you are set up and budgeted for it.
Good luck!!! You’ll be very happy you started investing young when you are older and the money gives you freedom of choice. I sure was!!!!