Every year, thousands of people in the U.S. get their degrees from colleges and universities and join the workforce. When you get your first job, you might be tempted to focus on pay and chances for promotion and ignore the "boring" details of your new employer's 401(k) plan. Hey, wake up! Look around! That will be your future.
It's common knowledge that most young people don't save for the future. They don't do it because they trust the Social Security system. If anything, the young people who are graduating from high school and college today assume that Social Security won't be there for them. The real problem is that when you're in your early twenties, 65 is just too far away to be worth planning for.
And it's not like the money has nowhere else to go. When you first move into your own place, you need to fill it with things. You need a car, too. And you have to eat. And every Friday, Saturday, and maybe a few other days, you need money to buy drinks at the club.
Wait a minute. What if I told you that if you start saving by the time you're 25, you'll almost certainly be a millionaire? That's right! Thanks to the magic of compound interest, if you invest a small amount now, you can end up with a lot of money in the future. Even if you can't fully max out your 401(k) right now—for 2006, that would mean putting away $15,000 over the course of the year—there are ways to make sure you save something. (Just a quick note. I'm talking about the Thrift Savings Plan (TSP) if you work for the government. If you work for a non-profit organisation, you may have a 403(b) plan.
Three ways to save money
No matter what kind of "defined contribution" tax-deferred savings plan you have, here are three tips that will help you:
- Get going right away.
You should sign up for a 401(k) payroll contribution as soon as you start working. Why? Simple: No one likes to save because they feel like they're losing money they'd rather spend. If it's already being taken out of your first paycheck, though, it's just one of a half-dozen or more other deductions on a pay stub that already has it. You won't even realise how much you'll miss out on.
- Get all the free money you can.
Many employers offer some kind of "matching" contribution, usually a dollar-for-dollar match or a 50% match, in which you get extra money based on what you put in up to a certain amount. In other words, if your company matches 50% of your contributions up to 6% of your pay, if you put in 6%, they'll put in another 3%, making a total contribution of 9%. That can add up quickly, and it means that even if your investments don't do well, you've already made a 50% return just by putting money in.
- Put away more money each year.
Everyone likes to get a raise. When you get a raise, you get more money, and if you're smart, you can use it to save more in your 401(k). Like when you start a new job, you don't know what your net increase will be when you get a raise. So, if you get a 3 percent raise, boost your 401(k) contribution by 1.5 percent . You'll still get a raise, and you won't even notice the difference.
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The other part of a 401(k) is how to put the money to work. In this case, you should go with your gut: once you've set it up, don't pay attention to it. Mutual funds make it pretty easy to set up, too.
A mutual fund invests in dozens, hundreds, or even thousands of different companies, so it's already more diverse than you could make it on your own. Choose a fund that follows the market and doesn't charge any fees. Sometimes a fund manager gets lucky, but in general, the market does better than any single stock pick. (Sometimes, a fund will offer a fund with a mix that changes itself based on when you plan to retire. If you can get one of these, it's your best bet. Even if they don't, most 401(k) plans have some kind of market track fund.)
Set up your account so that as much of your monthly contribution as possible goes to your chosen investment. Up to 2% of the value of a 401(k) account may have to be kept in a money market account, which is essentially a cash account, to cover the costs of buying and selling mutual fund shares. That's fine, but make sure you have enough cash to cover the minimum.
There's nothing to do but wait.
You've set up your 401(k), and payments are being taken out. They are being put into a market track fund that doesn't charge any fees. What comes next? Just keep adding more each year, and make sure that when you start a new job, your savings are at or above what they were at your last job. When you turn 50, talk to a financial planner about how you might want to move some of your money into bonds or other investments that give you a steady stream of income. But you can take it easy for the next few decades.
You are going to have a lot of money. Congratulations.
