Having made preparations to establish a system for saving money, I realized that I should also implement some sort of automatic system to invest some money. Unfortunately, at that time I had not heard of employer-sponsored retirement plans and this was partly because my first two jobs didn’t provide such opportunities. They are more prominent today, but I have discovered that many of us do not participate in these amazing vehicles.
I mentioned earlier that I started investing in mutual funds in an effort to allow my savings to have an opportunity to grow faster. As with my savings contributions, I also made this process automatic, wherein the money moved from my checking account directly into the mutual funds I chose at a designated brokerage account (more on brokers later). But even though this was a good thing, I later wished I had not only discovered but was also able to enroll in an employer-sponsored plan as my first step to saving.
When I started working for a company that offered an employer-sponsored plan, which was a Traditional 401k in my case, I immediately enrolled because I learned just how important it is to be in such plans. Even though I had my mutual funds system going, realizing the benefits of this 401k plan just had me in awe. This plan, like most other such plans, also invested in similar funds and instruments as I was doing on my own, but there were additional benefits that made it far better.
Though there are many benefits with the Traditional 401k and similar Tax deferred plans, including the fact that your money can be contributed before it is even taxed, thus subsequently lowering your taxable income…the biggest one for me is the employer contribution. Many of these plans would have terms that identify how they will match your contribution, and may indicate for example that they will match 100% of your contribution up to 3% of your paycheck. This means that if your pretax paycheck is $1000 and you contribute $30, they will match that by also contributing $30. That is an instant 100% return on your investment and therefore, you definitely want to contribute at least 3% of your paycheck, otherwise you are simply throwing money away.
For clarity, it means if you contribute $50 (5%) they would still contribute $30 (3%), but if you contribute $10 (1%), they will contribute $10 (1%) so you are throwing away $20 each time you get paid. Contributing higher than the 3% is still good but contributing less than 3% is just not a good strategy for establishing financial stability.
Of course there is usually the requirement of being vested, but this should not discourage a person from joining a plan. Even if you were to leave the company before you are fully vested, meaning you may lose a percentage of the employer’s contribution, you are still benefitting from making pretax contributions. But it is also important that we try to establish stability in our lives and moving from job to job should be a planned process as long as it is within our control. Imagine how much a person loses out on over time if they decide to embark on a life of job hopping…even if they are a dedicated saver, they are missing out on one of the best investment opportunities that one can be a part of.