Investing can help you become a millionaire over time, even if you’re starting from scratch. Despite the incredible potential investing has to generate wealth, many people find it challenging to even get started investing. That’s a tragedy, because the one certainty in investing is that $0 compounded for any length of time will still wind up being $0, no matter how the market performs.
With that in mind, there is one investment that is, hands down, the first investment you should make if you have it available to you. That investment is to put enough money into your employer-sponsored retirement plan such as a 401(k) to get a matching contribution. Indeed, before you make any other investment, anywhere, you should at least be maxing out the contribution it takes to get every penny of employer match you’re eligible to receive.
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Why investing to get a match is such a compelling idea
First and foremost, a matching contribution from your employer generally acts like the highest guaranteed return on investment you’re likely to find anywhere. A typical match is 50% of your contribution, up to some percentage — often 6% — of your salary. So if you earn $40,000 a year and get a match like that, you can contribute up to $2,400 in your plan and see an additional $1,200 deposited by your boss on your behalf. That’s like a 50% return on your investment, just for putting in your own cash.
Second, your 401(k) or other employer-sponsored plan represents one of the easiest ways to start investing. Typically, all you need to do is fill out a few quick web forms at work, and then the money starts getting automatically invested directly from your paycheck with no additional intervention required. That easy sign-up and automatic execution makes 401(k) type plans an exceptionally powerful wealth building tool for those who take advantage of them.
In addition, qualified retirement plans like 401(k)s offer tax advantages. Money invested in the plan grows tax-deferred, making compounding very efficient over time. On top of that, in traditional style plans, you get a tax deduction for your contribution, while in Roth style plans, you can withdraw money tax-free in retirement.
As if all that didn’t provide enough reasons, many plans let you set up your contribution as a percentage of your salary. That’s helpful in figuring out how to maximize your match. It’s also helpful because it means your contribution will automatically increase every time you get a raise, unless you’re already contributing the maximum allowed.
Should you invest in your 401(k) beyond that match?
Speaking of the maximum allowed, in 2020, you’re generally allowed to contribute up to $19,500 if you’re under age 50 or $26,000 if you’re 50 or older . If you’re considered a highly compensated employee or if your plan has lower limits than those generally allowed levels, you may face lower limits.
Contributing enough to your 401(k) to maximize your match is a no-brainer and is hands down the first investment you should make if you have it available to you. Contributing beyond that level, however, is a bit of a priority call. Certainly, the simplicity of contributing straight from your paycheck is a huge plus for putting more money into your 401(k), and there’s nothing inherently wrong with contributing more to it. Still, you might be able to make better use of that money elsewhere.
For one thing, 401(k) plans tend to have limited investment choices and often have fees attached to them. If your plans choices aren’t the greatest or if you face a hefty fee based on your 401(k) account balance, you might want to contribute your next set of retirement dollars to an IRA, instead.
For another, if you’ve invested enough to get your maximum match before getting the rest of your financial house in order, you need to make getting that house in order critically important. The high return of a match stops mattering once the match is maxed out, making most debt pay down a priority that should certainly be very high on your list.
In addition, while saving for retirement should be your first major investment priority, it probably isn’t your only one. Once you’re on track with where you need to be to reach a financially comfortable retirement by a typical retirement age, you should start saving for your other priorities as well. When you save for those other priorities, it makes a ton of sense to do so outside of your 401(k) or other qualified retirement plan.
After all, one of the downsides to 401(k) type plans is that it can be very expensive to use that money before you reach retirement age . That makes it important to save and invest outside those plans for your other, non-retirement goals.
Source:- The Motley Fool
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