2.4 Start Investing
"The best time to plant a tree was 20 years ago. The second best time is now." - Chinese Proverb
How to Get Started
If I were to start over with investing today, I’d begin by having a heart-to-heart with my past self. “Listen, kid,” I’d say, “Step away from the avocado toast and Starbucks lattes; they’re not as crucial as owning a piece of Apple or Amazon!” I’d set up my 401(k) with the zeal of a squirrel hoarding nuts for winter, maxing out contributions and hunting down every last employer match like it’s buried treasure. I’d devour investing books and podcasts like they were binge-worthy Netflix shows, trading late-night sitcoms for stock market insights. And, for good measure, I’d tattoo ‘Total Market Index Fund’ on my forearm—nothing fancy, just a gentle reminder that putting all my eggs in one basket is a recipe for a very messy omelet. Finally, I’d remember that patience is a virtue, and while waiting for compound interest to work its magic might feel like watching paint dry, it’s far more rewarding than my old habit of impulse-buying gadgets I didn’t need!
All you need to invest in are a 401(k), a Roth IRA, and a Taxable Brokerage account, and you’re practically the financial version of a Swiss Army knife! With your 401(k), you’re taking full advantage of your employer’s match like a kid in a candy store with free samples—only instead of candy, it’s retirement money! The Roth IRA is your secret weapon against Uncle Sam, letting you grow your money tax-free while feeling like a financial ninja dodging taxes with every contribution. And then there’s the taxable brokerage account, your playground for dabbling in stocks and feeling like Warren Buffett on a good day—minus the billions, of course. Together, these accounts are like the holy trinity of investing, making you feel both sophisticated and secure, while you sip your coffee and watch your future fortune (hopefully) grow. Sure, you can branch out and invest in other things like real estate later, but starting with these three gives you a solid foundation. Who knew adulting could be this much fun?
Let’s talk about the 401(k), the retirement plan that’s like a golden ticket to your future financial freedom. Imagine if Willy Wonka decided to stop making candy and start handing out retirement plans instead. Your 401(k) is that magical factory, churning out financial goodies every time you contribute. The best part? Your employer often matches a portion of what you put in, kind of like getting free chocolate bars just for showing up. It’s like being rewarded for eating your vegetables at the grown-up table.
Now, let’s not forget the tax benefits. Contributing to your 401(k) is like slipping past the tax collector with a cheeky wink. Every dollar you stash away lowers your taxable income, meaning the taxman gets a little less of your hard-earned cash. And the best part? Your investments grow tax-deferred. It’s like planting a money tree and watching it grow without worrying about Uncle Sam coming along to prune it every year.
Then there’s the power of compound interest, which is basically financial magic. It’s like having a tiny, diligent elf adding a little bit more to your savings every year. Over time, those little bits add up to a hefty sum. It’s not just adding; it’s adding and multiplying in a way that would make even your high school math teacher proud. You start to feel like a financial wizard, watching your modest contributions grow into a mountain of retirement gold.
In short, a 401(k) is the adult version of finding a pot of gold at the end of the rainbow. It’s your ticket to a comfortable retirement, where you can live out your golden years sipping piña coladas on the beach—or at least not worrying about how to pay for your next round of golf. So, embrace the 401(k), because future you will thank present you for being so darn clever.
"Start investing in your 401(k) today, and give your future self the gift of financial freedom." — Chris Hogan
Steps to Invest in 401(k)
Starting to invest with a 401(k) is a crucial step toward securing your financial future. Here are the steps to get started:
- Enroll in Your Employer’s 401(k) Plan:
- Check if your employer offers a 401(k) plan and find out the eligibility criteria.
- Complete the necessary enrollment forms, either online or through your HR department.
- Understand the Plan Details:
- Review the plan’s summary description to understand the benefits, rules, and any employer matching contributions.
- Learn about the vesting schedule, which determines when you own the employer’s matching contributions.
- Determine Your Contribution Amount:
- Decide how much of your paycheck you want to contribute. The IRS sets annual contribution limits (for 2024, it’s $23,000 for those under 50 and $30,500 for those 50 and over due to the catch-up contribution).
- Consider contributing enough to receive the full employer match, if available, to maximize your benefits.
- Choose Your Investments:
- Review the investment options available within your 401(k) plan, which typically include mutual funds, target-date funds, and sometimes individual stocks and bonds.
- Consider your risk tolerance, investment goals, and the time horizon until retirement when selecting your investments.
- Many plans offer target-date funds that automatically adjust the investment mix as you approach retirement age.
- Set Up Automatic Contributions:
- Arrange for automatic payroll deductions to fund your 401(k). This ensures consistent contributions and takes advantage of dollar-cost averaging.
- Decide on a percentage or a fixed dollar amount to be deducted from each paycheck.
- Monitor and Adjust Your Investments:
- Regularly review your 401(k) statements to track the performance of your investments.
- Rebalance your portfolio periodically to maintain your desired asset allocation.
- Adjust your contribution rate and investment choices as needed, especially if your financial situation or retirement goals change.
- Take Advantage of Financial Education and Resources:
- Many employers provide resources, such as financial education seminars or access to financial advisors, to help you make informed decisions.
- Use online tools and calculators to estimate your retirement needs and plan your contributions accordingly.
- Stay Informed About Changes in Contribution Limits and Rules:
- Keep up-to-date with changes in 401(k) contribution limits and IRS regulations that may affect your retirement planning.
- Adjust your contributions annually to reflect any changes in the limits or your personal financial situation.
- Consider Professional Advice:
- If you’re unsure about your investment choices or retirement planning strategy, consult with a financial advisor.
- A professional can help you tailor your 401(k) investments to align with your long-term financial goals.
Starting to invest with a 401(k) involves understanding your employer’s plan, deciding on contribution amounts, choosing the right investments, and continuously monitoring and adjusting your strategy. By following these steps, you can build a solid foundation for your retirement savings.
Internationally bestselling author and consumer advocate Dan Solin challenges some basic and misguided assumptions about traditional retirement plans to reveal that:
401(k) and 403(b) plans are laden with Porky Pig fees, poor investment choices, and conflicts of interest. You may be better off just saying “No!”
There is a simple way to make smart choices in these plans- and this book shows you exactly what to do and which funds to avoid.
There is one investment that could be the key to a successful retirement plan. You can do it yourself, with pre-tax or after-tax money. Create your own, inflation-proof pension plan that is guaranteed to provide you with monthly income for as long as you live, and beyond!