Like most children of the 80’s and 90’s, I have a deep love for the Back the the Future movies. No, not because Michael J. Fox was oh-so-dreamy as Marty McFly in those movies. It’s really because time travel via a Delorean is just about the coolest idea ever.
We’ve all got a couple of things we’d like to take back ever having said or done, and the Delorean is certainly the tool of choice for fixing those faux pas. However, few mistakes ever will top failure to plan for your financial future. Remember, those who fail to plan, plan to fail. Which means that if you aren’t investing in your future today, you’re already planning a financial belly flop for retirement.
We all do our fair share of moaning and groaning about bills, rent, mortgage, debt, utilities, and whatever other expenses we incur from month to month. It’s already enough of a challenge to pay bills and stay ahead of the game, especially for those of us at the beginning of their careers, or on the lower end of the income scale (or both). But it’s a challenge you need to be up to if you want to secure your future financial stability.
I’d suggest starting out by taking 1% of your income – more is better – and investing it into a 401(k) program (or similar) at your workplace. Most employers offer some type of 401(k) program to their employees. For those unfamiliar with what a 401(k) is, here’s a definition, courtesy of Investopedia.com:
A qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions 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 accrue on a tax-deferred basis.
Chickvestor Translation: You choose to enroll in a 401(k) program and the following things typically happen:
- You choose to have some of your pay put into a 401(k) account. This usually happens pre-tax. Pre-tax means that the money you choose to put away is taken out of your pay before Uncle Sam takes his share. You are not paying tax on the money you are putting into the 401(k)… yet. This decreases your taxable income, which in turn can reduce your tax bracket, decreasing the percentage of your income that you are required to pay in federal taxes. Any money that you don’t pay in taxes is money in your pocket!
- Employers typically will match your contribution to your 401(k) account, up to a certain amount, usually in a percentage. Meaning, if you put away your maximum of 5% of your pay in your 401(k), and that equals $3000, your employer will put in $3000 just to match what you put in. Suddenly, your $3000 annual investment is a $6000 annual investment.
- You earn interest on the money that you put away. That means your money accumulates value while waiting for you in the 401(k) account every year. You don’t pay tax on this money until you choose to withdraw it from your account, so let it compound interest work its magic on your money for a few years before withdrawing it!
- Be sure to read the fine print. Different 401(k) programs have different perks and limitations. Check with your employer to find out the specifics offered at your place of work.
Although 401(k) programs are not the only programs offered by employers, they usually are the most common. Other programs include Roth IRA’s, tax-deferred annuities, life insurance, and a whole bunch of other investment tools and strategies. Your best bet is to speak to your employer to find out your options for retirement planning.
The bottom line here is that if you aren’t planning for your future, you are committing a major financial faux pas. So unless you’ve got Doc Brown’s Delorean in the garage at home, start your savings account, the sooner, the better.