You are probably wondering how can my 401(k) possibly help me simplify my finances? Investopedia defines a 401(k) as 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. Most companies offer 401Ks or some form of retirement account which you can take advantage of to help you simplify your finances.
So enough with the details of a 401(k), how will it help me simplify my finances. Here are five ways a 401(k) can help you simplify:
Forced savings – When you sign up for your company’s plan, your contributions are taken directly from your pay check. You do not have to set up automated transfers to your savings account to save. Its already done for you. All you have to do is sign up and determine what percentage of your income you would like to save. Can’t get any easier than that. Having a 401(k) forces you to save and its a little bit more difficult to to stop the contribution. You can but not as easy as when you don’t control the transfers. You can’t tell yourself I forgot to make the transfer this month.
Free money – Who does not like free money? Many companies will match your contributions to your 401(k) which means more money for you. Having more money in the future will absolutely help simplify your finances. Here is the best part assuming you invest the money in a mutual fund the money the company contributes will be worth more than when they made the contribution when its time for you to retire.
Can reduce current taxes – Because your contributions to your 401(k) are pre-tax it will reduce your current annual income. Therefore it reduces your current tax liability. Who would not want to pay less in taxes? Check with your tax preparer to help determine how much you should contribute and how much of a tax benefit it will be.
Has limited investment choices - Yes limited investment choices can help you simplify your finances. I know when I have too many choices I tend to make slower decisions which delays the process. Also if this is your first introduction to investing you may be overwhelmed with too many choices. This can sometimes result in no action at all. Having limited choices makes it easier on you to make a decisions and not delay the process of investing your money.
Some offer target date funds – many 401(k) plans offer targeted funds. Targeted funds is a mutual fund that automatically adjust the asset allocation mix in the fund according to your expected retirement date. For example if you anticipate retiring in 30 years your initial allocation will be more aggressive with mainly stock funds as you get closer to your retirement date the allocation will automatically shift from a growth to a more conservative allocation which will have more bond funds to reduce risk and generate more income. Having these funds as a choice makes it easier on you because you do not need to make adjustment to your allocation it is done for you. That is one less thing you have to worry about. This post can help you with your 401k choices.
You didn’t think it was possible but it can happen. Your 401(k) can help you simplify your finances. So now take action by either contributing to your 401(k) or reviewing your existing 401(k) to make sure you are taking full advantage of the benefits. Til next time take one step at a time to simplify your finances.