The next thing you should do after making sure you’re saving your money in the right savings accounts is to check into that 401K. There’s no reason why you shouldn’t be plugging some money away into your 401K retirement account. The sooner you can start saving into your 401K the better you’ll be once retirement comes around. Plus, hopefully you have an employer that gives you an extra incentive to do so.
What is this “extra incentive”? Some companies will provide you with some type of 401K contribution match. If your employer does have some sort of match bonus then you should absolutely be taking advantage of that. That amount should be your absolute bare minimum contribution that you make to your 401K. If you’re able, you want to shoot for at least 15% of your paycheck going into your 401K. Some people will argue that isn’t enough or that it’s too much. What you “can” save will be different for everyone, but I firmly believe that you should try to save as much as you can.
So what exactly is this 401K bonus from my employer?
Your employer may match part of your 401K contribution. For example, you may decide to put away 10% off your income towards your 401K. Your employer may have a 100% match up to 3% of your income. This would mean that if you saved at least 3% towards your 401K then your employer would also add that same 3% to your 401K retirement account.
To keep the numbers easy to work with let’s say you make $50,000 per year and you decide to save 10% toward your 401K. That would be $5,000 towards your retirement account for the year. If your employer matches 100% of the 3% then they would add $1,500 ($50,000 X .03 = $1500, $1500 X 1.0 = $1500) to your 401K contribution for a total of $6,500. If you don’t make a 401K contribution you would be missing out on that $1500 of free money from your employer.
Even if your employer doesn’t give you any sort of match or incentive to make a 401K contribution you should still do it. This is assuming you already have yourself a sizable emergency fund in your online savings account. Your emergency fund should be able to pay for all your monthly expenses for 6 months. This is in case you lose your job or you somehow stop getting income for a period of time. This way you have some money to transition to your new job or income. Once you have that money saved you should start saving for retirement.
401Ks and their easy to invest Target Date Funds
So now you’re ready