Investing can help you become a millionaire over time, even if you are starting from scratch. Despite the incredible potential for investing in generating wealth, many people find it difficult to start investing. This is a tragedy, because the only certainty of investing is that $ 0 compounded for all the term will always be $ 0, regardless of market performance.
With that in mind, there is one investment that is, without question, the first investment you should make if you have one available to you. This investment involves putting enough money into your employer-sponsored retirement plan, such as a 401 (k), to get a matching contribution. Indeed, before doing all other investment, nowhere, you should at least maximize the contribution needed to get every employer penny you are entitled to.
Why investing to get a match is such a compelling idea
First and foremost, a matching contribution from your employer usually acts as the best guaranteed return on investment that you are likely to find anywhere. A typical match is 50% of your contribution, up to a certain percentage – often 6% – of your salary. So if you make $ 40,000 a year and get a match like that, you can contribute up to $ 2,400 to your plan and see an additional $ 1,200 deposited by your boss on your behalf. It’s like a 50% ROI just to put your own money in.
Second, your 401 (k) or other employer-sponsored plan is one of the easiest ways to start investing. Typically, all you need to do is fill out a few quick web forms at work and then the money automatically starts pouring straight from your paycheck without any further intervention. This easy enrollment and automatic execution make 401 (k) -type plans an exceptionally powerful wealth building tool for those who benefit.
In addition, qualified retirement plans like 401 (k) s offer tax advantages. The money invested in the plan grows on a tax-deferred basis, making membership very efficient over time. On top of that, in traditional style plans you get a tax deduction for your contribution, while in Roth style plans you can withdraw money upon retirement.
As if all of this didn’t provide enough reasons, many plans allow you to set your contribution as a percentage of your salary. This is useful in determining how to maximize your match. This is also useful because it means that your contribution will automatically increase every time you get a raise, unless you already contribute to the maximum allowed.
Should you invest in your 401 (k) beyond this game?
Speaking of the maximum allowed, in 2020 you are generally allowed to contribute up to $ 19,500 if you are under 50 or $ 26,000 if you are 50 or over. If you are considered a highly paid employee or if your plan has limits lower than these generally allowed levels, you may be faced with lower limits.
Contributing enough to your 401 (k) to maximize your match is a no-brainer and is hands down the first investment you should make if you have it at your disposal. However, contributing beyond that level is a bit of a priority call. Granted, the simplicity of contributing directly from your paycheck is a huge plus in putting more money into your 401 (k), and there is nothing inherently wrong with contributing more. Still, you may be able to better use that money elsewhere.
On the one hand, 401 (k) plans tend to have limited investment choices and often have fees attached to them. If your plan choices aren’t the best, or you’re facing high fees based on your 401 (k) account balance, you might want to contribute your next set of retirement dollars to an IRA.
On the other hand, if you’ve invested enough to get your maximum before you get the rest of your financial house in order, you need to make that house’s order of critical importance. High performance on a match no longer counts once the match is hit, making most debt repayments a priority that should definitely be very high on your list.
Plus, while saving for retirement should be your number one investment priority, it probably isn’t the only one. Once you’re on the right track to achieving a financially comfortable retirement before your normal retirement age, you should start saving for your other priorities as well. When you save for those other priorities, it makes a lot of sense to do so outside of your 401 (k) or other qualified retirement plan.
After all, one of the downsides of 401 (k) type plans is that it can be very expensive to use that money out before you reach retirement age. It is therefore important to save and invest outside of these plans for your other non-retirement goals.
The sooner you start investing for your retirement, the easier it will be to find a financially comfortable solution. Putting enough money in your 401 (k) to maximize your employer’s suitability is an incredible first step that will get you started on the journey with a boost that brings you that much closer, much faster. This is a great way to improve your chances of having financial comfort in your golden years.
What Are The Main Benefits Of Comparing Car Insurance Quotes Online
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