If you’ve been recently employed, whether it’s your first job after graduation or a new job, one of the things you should start doing is setting up your financial plan.
Your goal should be to secure your future, and there are some things you can do now to make sure that happens. Here are three smart money moves for employees recently.
1. Let your employer’s 401(k) match be your baseline
A 401(k) plan is one of the best tools for saving and investing for retirement. In addition to making pre-tax contributions and lowering your taxable income, one of the biggest benefits you can have is an employer matching contribution. Employers will often match up to a certain percentage of your contributions. Whatever your employer is willing to match should be the least you contribute.
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If your employer matches 3%, your bare minimum should be 3%; if it is 5%, your minimum should be 5%; Whatever the case, you should never contribute less than your employer is willing to match. Otherwise, you are essentially leaving free money on the table because an employer match is a guaranteed way to get a 100% return on any amount.
If you make $100,000 a year and your employer matches 5% of your contributions, that’s an extra $5,000 a year if you contribute at least that much. The 401(k) contribution limit is $20,500 ($27,000 if you’re age 50 or older), so you’re unlikely to get that match unless you’re close to the top 1% of earners, but a match of employer can represent a lot of money in your account.
2. Use a Roth IRA if you’re eligible
One of the main drawbacks of a Roth IRA is the income limit for contribution eligibility. If you’re single and earn less than $129,000, you can contribute the full $6,000 ($7,000 if you’re age 50 or older). If you are married filing jointly, you can contribute the full amount if your income is less than $204,000. If your income is $144,000 or more ($214,000 or more if married filing jointly), you are not eligible to contribute at all.
It cannot be overstated how beneficial it is to be able to have your investments tax-free. If you put $6,000 into a S&P 500 fund in a Roth IRA that yielded 10% per year for 30 years, you’d have more than $104,000 without contributing another penny. If that happened in a regular brokerage account, you would owe taxes on that amount when you sold your shares. But since it’s in a Roth IRA, the entire amount would be yours. Take advantage of the benefits while you can.
3. Set up automatic transfers
You can never go wrong doing things that make your life easier. When investing, one of the ways to ease your burden is to take some of the work out of your hands. That’s why it’s helpful to have the money automatically transferred to your investment account, whether it’s a brokerage account or an IRA.
Having an automatic transfer set up not only takes a step away from you, but it also makes it easier for you to get used to living without that money because you don’t have it in your bank account for very long.
If you have the means, you should at least aim to maximize the allowable IRA contributions. For example, if your plan is to max out your Roth IRA, you can set it to automatically transfer $250 every two weeks from your paychecks. Or, if you get paid once a month, you can set it up to transfer $500 each time. How often you do it isn’t too important; the important thing is that you are investing and working towards your future financial security.
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