Investment 101: How the 401K Can Increase Your Wealth

by Nicole
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Thanks for visiting my series on investments. This is part 1 in the series. If there is a topic you would like to be covered, please let me know.

Most companies offer a 401K program. You may have heard of it and for many, it may seem overwhelming. The following will simplify the 401K program and I will explain why I believe it is one of the most powerful tools for saving for your future.

What is a 401K

A 401K is a tax-advantaged investment vehicle designed to help you invest for retirement. Most private companies offer a 401K program and provide an employer match to incentivize employees to contribute (more on this below & in the video). Employees decide how much money they would like to contribute and how that money is invested. Contributions made to a traditional 401K are made tax free and you do not have to pay taxes until you withdraw the money in retirement.

Pros of the 401K

There are 2 main advantages of investing in a 401K. 

The first advantage is the employer match. Most employers will match contributions you make to your 401K up to a certain percent. For example, an employer may match up to 5% of your salary (this will differ by employer). For someone making $60,000 a year, this equates to $3,000 (this is 5% of 60k) in FREE MONEY that your employer will deposit into your 401K as long as you contribute $3,000. 

The second major benefit is the tax advantages! Check out my video on YouTube below for a detailed explanation!

The best time to start saving for retirement is yesterday. The second best time is today.

Cons of the 401K

The earlier you can start, the stronger your financial base will be. That being said, the one consideration for those saving money in their 401K is that this money is marked specifically for retirement (retirement is defined by the government as age 59.5 +). This does not mean your money is completely locked up but the point is to save it for retirement. 

There are exceptions for when you can withdraw money prior to retirement such as buying your first home. Although we wouldn’t recommend taking this money out prior to retirement, it is not untouchable.

Although I wouldn’t consider this a con another consideration is that you will need to pay taxes on withdrawals of this money when you retire. With good tax planning, many individuals are able to pay very low tax rates in retirement.

Where Can I Invest This Money

Investing is personal and much like no one can define how valuable something is to you, I cannot tell you how to invest. Click here to read my blog about value based spending. This said, I will provide very general guidelines and recommendations here and go into more details in a future post. For individuals earlier in their careers, I would generally recommend investing in low cost, equity index funds

Let’s break this word down and explain what a low cost, equity index fund is:

Low cost – means that you are paying the manager of the fund a very small fee to manage your money. When you are choosing your investment you will see a term, “expense ratio”. This is simply the fee you pay to have your money managed. I consider an expense ratio under 0.10% to be low cost. Most 401K plans should have a low cost option however some will not. Regardless, this shouldn’t stop you from investing. 

Equity – means you own a very small portion of a company.

Index fund –  means that you are invested in a fund consisting of a variety of stocks which makes it easy to be diversified.

How Much Money Should I Invest

At a minimum, I would recommend investing enough to get your full employer match. Remember this is FREE money and you should consider this part of your salary. Use it, or lose it… 

 

In 2020, individuals can contribute up to $19,500 a year. I would recommend contributing as much as you feel comfortable. Note that every dollar you contribute helps with tax savings! 

 

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Questions?

Here at A Healthy Profit, we believe it is important to eat healthy and exercise and in synchrony, grow your wealth. Our goal is to empower you to live healthy and become wealthy. 

Feel free to comment below or contact me if you need clarification. Also, let me know if there are any other specific topics you would like me to cover in the investment series. Stay tuned for more to come!

XO,

Nicole 

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[…] To read part 1, “Investment 101: How the 401K Can Increase Your Wealth”, click here. […]

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[…] I ended up losing money by paying off my loans as quickly as I did rather than contributing some of that money to a tax advantage account such as the 401k. Any money you contribute to your traditional 401k remember is pre tax. This will end up saving you a lot of money over time. If you want to learn more about tax advantage accounts and the order in which to invest, read my investment 101 series here. […]

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