Chances are if you ask a twenty-five-year-old how their retirement investments are doing, they will say, “what investments?” There is a stigma surrounding financial planning that investing in retirement is something you do when you are older.
One thing that should become a priority once you land your first job is learning how to properly save. One way to help yourself properly save is to factor a 401(K) into your monthly budget.
You might be thinking that you’re too young to start planning, or that you have all the time in the world to build a retirement fund, but the truth is you need to start now. Just like all good habits, the earlier you start, the more of a positive impact you will see in the long run, and this can especially be seen in a 401(k) plan.
What Is A 401(K) Plan?
One of the best and most stable investment funds you can place your money into is a 401(k) account. A 401(k) is a basic saving and investing plan that you place money into each month, that you receive a tax break on. This is a plan offered to employees by their employer and is popular as a retirement fund. It is relatively hands-off, as money is taken from your paycheck each month by automatic deductions.
What Are the Benefits of A 401(K)?
This type of account has many benefits that come with it. Make sure to check with your employer the specifics, because sometimes employers even match a portion of what you put aside to save.
Another benefit to early investing is that the contributions you make to a 401(k) plan are taken out of your paycheck pre-IRS tax. Essentially you will be saving money now and in the future by investing your money in a 401(k). Not only does a 401(k) protect you from the IRS cut, it also protects you from paying taxes on investment growth within the fund for a while. Eventually, you do have to make payments to the IRS, but you can wait to do that until you are in retirement and already making withdrawals from the account.
Aside from protecting you from investment taxes, and the IRS, a 401(k) also lowers your income taxes. For example, if you make $50,000 a year and place $13,500 into your account, then you are only taxed on the $26,500 that is left over.
The 401(k) account also grows at an annual rate, and you create a compounding effect with your money. So, over time, you will make money off of your money. If you start investing earlier, then the longer your money has to compound, and the more money you will have for retirement.
Retirement might sound distant to you, especially if you just entered the workforce, but you will appreciate it when you are older if you start investing in a 401(k) now.