I just started at a new job and my company offers a 401k - they asked me how much I want to take out of my paycheck to put in and I have no clue. I didn't ask because I didn't want to look stupid. I really don't want to put a lot in because I need all the cash I can get right now. Won't it be far easier for me to save when I'm older and all these student loans and credit cards are paid off? Plus, I'll be making far more money in the future than I am now. -Save or Not to Save, Milwaukee, 24
Dear Save or Not to Save,
First, I suggest you take some time to up your financial IQ. Most people right out of college feel either stupid or overwhelmed when it comes to finances because the majority of us do not learn about credit, investing and saving prior to or during college. I think every high school and university should be required to offer a practical class on money management and understanding finances as this would be far more helpful than a standard college-calc class. I mean, who really uses what they learned about Differential Equations? But since Finance 101 isn't offered, it's incumbent upon you to learn.
I'll get you started. A 401k plan is a type of employer-sponsored and defined contribution retirement plan that allows an employee to elect a portion of his or her wage paid directly, or "deferred," into his or her 401(K) account. It's a way to save for retirement while deferring income taxes on the saved money and earnings until withdrawal. Most companies will match up to a certain amount of what you elect to put in, so the more you save, the more you will get from your company. So, before you decide, ask if your employer matches employee contributions and find out up to what percentage they match. And do not be afraid to ask questions, especially of the HR representatives at your company - that is what they are there for.
My advice is to put in at least the amount your employer matches. So if your employer matches your contribution up to 4%, then put in 4% of your income. If you can contribute more, then I encourage it. I understand that your take home pay will be less; however, you will be making an extremely wise investment in your future. Sure it's hard to think about retirement now when you are just getting started, but by starting to save now, the money in your retirement account will compound at a much higher rate.
As far as your loans and credit card debt are concerned, be sure to consolidate your student loans at a low interest rate and STOP using credit cards so you stop accumulating debt. Live on a cash or debit basis only until you get your credit cards paid off. People who continue to use credit cards take much longer to pay down their debt.
I asked Michael B. Rubin, author of Beyond Paycheck to Paycheck: A Conversation About Income, Wealth, and the Steps in Between to shed some light on your question about "to save or not to save." Here is his expert advice: "On many levels, it's actually easier to save as a twenty-something than it will be later in life. True, you may have student loans and a relatively low-paying job. On the other hand, your family responsibilities may never be lower than they are right now. So, too, likely are your income taxes. Most importantly, it is while you are in your twenties that you really begin to solidify your financial habits. If you are unable to save now on your current income and relatively low family obligations, it will be that much harder to suddenly restrain your spending when you legitimately need more. Nearly one in five folks making $100,000 or more lives paycheck to paycheck. I doubt any of them thought they'd still be living that way back when they made far less." Learn more from Michael Rubin's blog.
Take charge of your financial situation now! You are merely assuming you will make more money in the future, but you don't have a crystal ball. The only thing you can really plan on for the future is to invest money into your 401K today. And there are countless ways to save money and make taking less home pay immediately more viable - you just have to adapt your lifestyle a bit. The reality is that twenty-something life in today's economy is not like an episode of Entourage. So skip three meals out a week, cut back on $10 cocktails, resist buying new gadgets you really don't need and cancel your premium cable channels. Be a little uncomfortable now so you will be far more financially comfortable in the future!! * Christine
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