Just landed a new job (Congrats!!!) Now what?
Got an email from a relative who just graduated and landed with a nice job. I told him the first thing is to review his employer benefit packages. All of the large companies and mid-size companies offer some sort of 401k matching plan. Some requires one year of employment before eligible for 401k matching, some provides matching instantly. Regardless, you should start contribution immediately if at all possible.
Over the years, i've noticed that so many of the young professionals, especially those that just entered the work force, do not care to contribute to their 401k accounts. Most know about
their employee matching, some just think that 5% or 3% (whatever the employer matches) is too little to make a difference. I
want to lay out a couple scenarios to show that 5% is actually quite a bit chuck of $.
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Example: Joe, Single, making $50,000 a year. Your employee offers matching of the first 5% of your contribution. Annual Employee Contribution:50,000 x 5% = $2,500 Annual Employer Match Free Money: 50,000 x 5% = $2,500 Tax saving from contribution*: 2500 x 15% = $375 * considering federal tax bracket of 15%, not including savings from state tax. |
Essentially, Joe's 2,500 contribution to his 401k account becomes $5,375 at year end (that's $5,000 in 401k account, assuming no investment return, and $375 he saved from taxes, so checking account most likely), this is a rate of return of 115%, not considering any return from the investment itself. No where on earth will give you a better rate of return for your investment. It is mind boggling for me to know that so many of young professionals throw away this money every year!
Now, some people may very well know that they should start saving early, after all, this topic/advice has been talked about over and over and over again. However, you may have credit card debt to pay, student loan to pay, which is very common in the recent graduate/young professional group.
The greatest misconception was ' Before you invest in anything, pay off credit card/student loan first,'... instead you should always invest in your 401k just to get the matching first...
| To continue the previous example, if Joe wants to take the $5,000 out of his 401k account to pay off his loans, what's going to happen? He will incur a 10% penalty, and pay taxes as well. Penalty and taxes don't sound well, but just wait until you see the numbers...Penalty: $5,000 x 10% = $500 Taxes: $5000 x 15% = $750 Joe's take home for debt payment is $5,000 - $500 - $750 = $3,750 |
Remember, Joe only put in $2,500, he's taking out $3,750! So if you work for those nice employers out there offering immediate matching, please please take this advantage from day one! What if your employer requires minimum of 3 months or 6 months or 1 year of employment before they will match your 401k contribution?
Rule of thumb:
- if you really need money to make your ends meet, obviously don't have anything to spare and contribute to 401k
- if you do have extra money left over after paying your essentials, contribute to 401k anyway, the money you put away now, saves your tax payment for the year, and the investment grows.