Saving money is hard, especially when your fresh out of school *cough, cough* or a decade out of school *cough, cough*. Not only are you probably stuck ‘paying your dues’ with an entry-level job but being a grown up is quite honestly just plain expensive. The list of things you need to be paying on a monthly basis alone canquickly tally up and consume almost all of that entry-level salary.
Saving money though isn’t about simply putting cash into your piggy bank and calling it a day. Saving appropriately involves a whole slew of other factors, that unless you were a finance major in college you may not have exposure to. However, not having exposure to these things is not a good excuse for not saving. It’s highly important that you start saving money for not just retirement but also for unforeseen circumstance and ‘treat yo self’ emergencies, because let’s face it avocado toast and Kendra Scott are not going to pay for themselves.
There are plenty of ways to actually start saving some of your hard-earned cash and most of them can be in small ways. While everyone’s situation is slightly difference, there are tons of small ways to start saving some money. Enter what we call a 401K.
So what exactly is a 401(k)? According to Investopedia, “A 401(k) plan is a qualified employer-sponsored retirement plan that eligible employees may make salary-deferral contributions to on a post-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings in a 401(k) plan accrue on a tax-deferred basis.
That all made total sense right?
In a nutshell, a 401(k) is offered by employers to help employees (YOU!) save for retirement. Meaning once you get paid whatever amount you have deemed going to your 401(k) account, will but automatically withdrawn from you paycheck and put into your retirement account. While not all companies offer these as a benefit, most who do offer it will also generally match what you put into the account up to a certain percent. There are different ways companies can match what you invest into a 401(k) as well. One of the more common ways are by doing a dollar for dollar match or a 50 cent’s to dollar match up to a certain amount, of course.
So let’s take the dollar for dollar example for a spin. Say I make $1,000 per pay period before tax and I elect to have 5% put into my 401(k). Pretax, 5% of $1,000 is $50 dollars a pay period that is automatically being placed into a savings account. Now with this example say my company offers a 2% match. Since I’ve obviously investing more than 2%, I’m not just putting $50 a pay period into savings, I’m actually putting $70 per pay period away (50 + 20 = 70). Which might not seem lot a whole lot but if you consider you get paid bi-weekly, there are 26 pay periods in a year, and you do this for say 30 years at the same rate; you’ve actual saved $54,600 without even considering any interest you might have been accrued in those 30 years. That’s $5 a day that your saving and roughly an additional $2 per day that your company is paying you, just because you’ve decided to save for your retirement. That’s sounds like ‘free money’ to me.
Now I know that not all companies view their employee’s retirement as a priority so your company may only match you 1% or not even offer a 401(k) but I have also seen companies offer up to 10% dollar for dollar which is amazing, and something you really need to take into consideration when viewing job offers.
I know this all sounds pretty awesome, so what’s the caveat to these savings accounts, huh? Well I’m glad you asked, because while they may not have ‘bad limitations’ per say there are things you need to consider in order to make sure you’re contributing the right amount for you.
Overall, 401(k)s are a great way to help save for your dream retirement. I’m talking a year long cruise baby! But you do need to be realistic and aware when it comes to these plans. You need to make sure you understand the plan being offered by your company and if you don’t you can generally contact the company hosting your 401(k) plan or even contact HR in your company to get someone to walk you through the basics. I know it can seem daunting at times and that even $50 a pay period can seem like a tonnn of money, but a 401(k) is all about investing in your future. If $50 a pay period is to much, try starting with a smaller amount and boasting the amount up just a smig each time you get a pay increase. Anyting is better than nothing. And to be quite honest, if you’re not investing in yourself, your lacking a basic method of self-care, which is planning for you future.