The Best Financial Move I Ever Made - Wanted to share because it is so easy!

In My Humble Opinion
1

I hope no one reads anything I am about to post as arrogant or self righteous, but I see so many people - some close to me - who live paycheck to paycheck, have no savings, have mounting debt, use payday loans, spend like the zombie apocalypse is next week and generally do not plan for the future.

Disclaimer:

  • I am not a financial expert and do not claim to be
  • I was not born into money or privilege
  • There are probably better ways to save for retirement
  • While I make a very decent living now, I would not say I make much more than most educated professionals.

Anyway, I received some advice about 15 years ago when I landed my first decent paying job. I had - literally - zero dollars saved despite being a 29 year old making 60k a year with about 25k in actual expenses. Clothes, new cars, electronics, credit cards… reckless.

Now at 44 I just reached a milestone (this month!) for me of having 500k in retirement savings in almost exactly 15 years, starting from zero. This through two home purchases, two kids in college, two layoffs and about 4-6 months of unemployment during really some bad economic times. I know that 500k is not a ton of money, many of you probably have more and have done better, but 0-500k in 15 years without even thinking about it, without winning the lottery and with a good but not incredible annual salary is a good feeling.

The key here that I want to share is that all you have to do is take that 401k your company offers and put the federal maximum in… 25%, every single check.

That’s it!

Do not worry about the company match! It is so amazing to me how many people put in the exact amount from their check that the company matches (say 6 or 7%). What is the logic there?

25% sounds like a lot I know but you will adjust and you will be so thankful you did. Granted the earlier you do it in life, the easier it is to adjust… but regardless you WILL adjust and eventually you forget about it coming out every week.

It is such a no-brainer and let me tell those that do not have that safety net, how comfortable life can be knowing you have that “nest egg” put anyway in case of the unexpected.

If the 25% percent all at once wont fit in the budget, then start raising it a percentage or two EVERY month without fail. You may find that you eat at home one extra night a month or maybe you can wait until that new Xbox game is half the price used… small adjustments each month and within a year you will be saving money like crazy.

Thoughts?

Can anyone else testify to the magic of a 25% 401k contribution? :smiley:

2

My company doesn’t offer matching. Does that mean I shouldn’t contribute anything to my 401(k)?

3

Not at all… in fact my whole point was that the company match should have ZERO bearing on what YOU do. If the company provides a match of 1% or 10%… then great, but that is just gravy and should not impact the tax deferred and pre-taxed savings you can put away before you ever get your check.

4

You’re aware that you’ll be taxed on that at withdrawal, right? I contribute up to the match, and then dump funds into a Roth. And then into a Roth 401(k), and then back into the 401(k).

That being said, yes, investing money right away when you’re young is important, even if it’s $20 a month in a personal IRA. You build good habits, and when you finally pay attention to it when you’re 30 or so, you will easily see the magic of returns over time. Assuming all is still well financially, my husband and I will be gifting our daughter a Roth with $1,000 in it at graduation.

5

I think saving money long term, investing it in reputable stocks and then letting compound interest work in your favor over time is a good plan. My husband and I have about $800,000 in direct, non-housing equity based savings based on similar efforts at saving and investing in blue chip stocks as well as contributions to our 401k’s. So far this year, we’ve made over $14k in dividend income alone. That income is taxed at a far lower rate than our other income and gets reinvested in the market immediately.

So congrats and good plan!

6

First off, people shouldn’t blindly take your advice to contribute 25% of their paycheck to a 401k. The IRS sets an annual contribution limit, which is $17,500 this year. If someone makes more than $70,000 a year and contributes 25% of their paycheck, they may be subject to penalties on excess contributions.

Other than that, congratulations on having a big retirement account. I like to also have investments that do not have penalties on withdrawals, so I don’t put all my savings into restricted programs like 401ks or IRAs. YMMV.

7

We plan on living off my husband’s paycheck when he starts his residency in July and using my paycheck for savings. We hope to pay off school, car, and credit debt with my pay and put what is left into savings, then live off his paycheck. We have been living paycheck to paycheck and off the kindness and generosity of others for far too long since we have both been in school and having kids, and it is so good to finally see the financial light at the end of the tunnel.

8

Congratulations! I know people who were able to do this and it worked for them as well. It isn’t that surprising unless you consider compound interest to be magical. Doing it early is the secret.

But, a lot of people aren’t able to contribute a significant (or any) amount to a 401K. Other considerations come into play when you have a family (for one instance) or don’t have a job that provides 401Ks as a perq. To the people who have no access to such a savings plan, your wonderful financial move seems like an affront to their sensibilities. Tread lightly, my friend, when trumpeting your success. Just a kind word of advice.

Nevertheless, I am very pleased that you have a nest-egg to depend upon if you ever suffer a severe setback. That frees you to do your very best with your life. That is a good thing.

9

For me and yes YMMV for others, the fact that this savings comes out before you even receive your paycheck is what makes it so simple because you just adjust your spending based upon the amount you “bring home”.

Yes I simplified the post so as not to get in the weeds of other details such as the 17.5k annual contribution maximum (5.5k or 6.5 depending on age for a Roth).

Again was not trying to offend, some of you are certainly more investment wise than myself.

P.S. Yes I am definitely aware that I will be taxed at withdraw, that is why its called “tax deferred” :smiley: The idea/plan/hope is that when I retire I should be in a much lower tax bracket than I am currently which makes the move - at least for me - smart.

10

You deserve kudos for your financial discipline, but the notion that you should contribute as much as you can to your 401(k) is not always the best idea. The purported benefit of tax-deferred defined contribution plans is that you will be in a lower tax bracket when you withdraw, but that’s not a given. And you’ve given up a tremendous amount of liquidity in the meantime.

11

Personally I prefer more diversification. I am building a 401k and think it is smart to do so, but I also work on a stock portfolio divided into two sections, value and growth. So there is some dividend income (I wish it were $14k like the poster above!) and hopefully some stock growth. If I need to spend money on a house or a car or what have you, I can fund it out of that and leave the 401k alone. And I am trying to keep a cash position equal to 10% of the portfolio in case everything crashes or who knows what.

Plus, with potentially decades in my career left if I work that long, I am already vested in a pension and also hope to get at least some Social Security some day.

The numbers aren’t very big right now, but if I can keep it up for even a decade I should be doing pretty well.

12

We’ve simply contributed the max for years - which for us was lower than 25% Plus deferred compensation - which isn’t really a “retirement” fund. Yep, it adds up. Two incomes, maxing 401ks. Its one reason I was able to “retire” at 47.

13

Good advice but tough to follow at lower income levels. Much easier to live below your means when you have the means to.
If you gave me this advice 10 years ago when we were living off of my solo $50K I would have said “no way”. Today with both of us working and making close to $200K it’s a lot easier to live beneath our means and stick 25% into IRAs.

14

Who else read the title and mouseover and clicked in expecting spam? I’m happy to see the good advice, but kinda disappointed that there’s nothing to point at and laugh or get offended at.

15

It’s even harder to follow at higher income levels, for the reason Ravenman pointed out.

How do you manage to put $50,000 a year into IRAs?

16

The purported benefit is that you can earn compound interest on the piece that you would have ordinarily paid in taxes. If you want to hedge your tax bet, then you can also contribute to a Roth.

17

I was disappointed that the thread title wasn’t “One weird trick I learned for total financial independence!”

18

I’m just relieved that it isn’t about the supposed “magic” of compound interest (which is just money keeping track with economic growth, and not magical at all). As it is, it appears to be basically a recommendation that people should save some of their income so that they have money when they retire. And who could disagree with that?

19

I think the real takeaway is to have whatever savings you intend to save (401k, roth, savings acct, etc…) taken out before the money hits your checking account balance.

It’s a lot easier to accumulate savings if you never see it to spend, than to actually deliberately take money you might want/need and put it into a savings account. Essentially if you never saw it, you didn’t miss it, kind of thinking.

20

Putting a significant amount (like 25%) of each check into savings is a good idea. Putting it directly into your 401(k) can be an easy way to do it, since if you never see the money in your hand, you’ll be less tempted to spend it. However, if you can control your spending in other ways, it’s not necessarily the best way.

Ideally, if you have the self-control for it, you want to be putting your savings money in the best investments you can. Now, if your employer is matching funds for one particular kind of investment, that generally makes that kind of investment quite good, and probably the best investment you have available to you, so it makes sense to put as much in that as you can. However, once you get past the point where your employer is matching your funds, there are probably other investments you can find that are better, so start putting money into those instead.

That said, though, saving money in any sort of investment is better than pissing it away frivolously. And if a direct contribution is what it takes to stop you from pissing it away, go for it.

Aside:

$50k is a “lower income level” now?