Why You Need To Start Your 401k Now, Not Later

The transition of moving from a student into the work force can be an intimidating phase of your life. Not only do you now have to learn new skills and apply problem solving habits honed through your course work, but you must also make important decisions that will impact your life for decades to come. Much of that has to do with how you handle your money and what you value as an individual.

My first words of financial advice for younger investors is to always focus on paying down high interest rate credit cards and have a “rainy day” fund for emergencies. This is critical to establishing a safety net in case you lose your job and keeping your credit intact.

Once you have those objectives in place, it’s time to think about saving for the long-term. That’s when you need to get involved in your company 401(k). This retirement savings vehicle is a critical component of financial security and one that you should be maximizing to its fullest.

What Is A 401(k)?

This tool is an investment account where you can set aside a portion of your paycheck each month before the money is taxed.Most employers offer these types of plans or equivalent savings vehicles so that you can easily invest for the long-term.

401(k) plans have several advantages and drawbacks. Foremost, they allow you to contribute money on a tax-deferred basis. That means you don’t pay any taxes on the money you are investing until you decide to pull it out much later. This also allows you to reduce your net taxable income to the IRS so that you can potentially pay a lower tax rate. Many employers also offer a matching contribution up to a certain percentage of the amount that you contribute. This is additional free money that you can earn simply by participating in the plan.

The primary drawbacks of a 401(k) are limited investment options and potentially higher embedded expenses than individual retirement accounts (IRAs).Most 401(k) plans have anywhere between 15-30 fund choices that are selected by the employer or an advisor. You don’t get to choose the menu of funds, but you do get to decide which funds to own and how you want your money invested. There are also penalties that can apply if you need to take the money out prior to retirement for an unplanned expense or other need.