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I didn’t quite understand this when I first started working. However, it’s a pretty simple principle
(once someone explains it to you). Many companies have a 401K investment plan in which you can
The 401K consists of different investment vehicles in which you can elect to invest. They are separate
and distinct from your company stock. The 401K will probably also provide an option to invest in the
company stock.
A significant benefit of 401K plans is that you invest in them with pre-tax dollars. In other words, you
don’t have to pay taxes on the dollars that go into them (directly from your paycheck). However, you
must use only dollars that you won’t need until retirement (there is a significant penalty for
withdrawing the funds before you turn sixty-five). This is another forced saving vehicle for you.
Another significant advantage of 401K plans is that companies will often match anywhere from 1 to 5
percent of your gross salary. For every dollar you put in your 401K plan, your company will also put
in a dollar (sometimes, the company will match 50 cents or 25 cents on the dollar). Over the past
couple of years, the economy has forced some companies to cut back on this benefit. Still, many
companies continue to offer their match.
An example will help you understand it better. Let’s say you elect to invest $5,200 a year in your
company’s 401K. Thus, the company will automatically take $100 (pre-tax) from your salary every
week and invest it in your choice of investment options.
Let’s say your gross salary is $65,000 a year. If the company matches the first 4 percent of your
$65,000 salary, then it will add $2,600 a year to your 401K investment (for free). That’s pretty
significant, especially if you do this over time. Now, let’s look at how much is being invested
▪ Your 401K investment = $5,200/year
▪ Company match = $2,600/year ($65,000 x 4 percent)
▪ Total 401K investment = $7,800/year ($5,200 + $2,600)
I don’t want to confuse you with the math. Simply put, you’re making 50 percent ($2,600) before
you even start investing your money. If given the opportunity, I would do this every chance I got. Yet
many people bypass this company benefit.
So, force savings by using your company’s 401K benefit, and contribute up to the point of the
company match. This principle should make you significant money over time.

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