WARNING: This is still a draft. Please post comments with questions and suggestions.

Tom’s Finance Guide Part 6: Interlude about 401(k)

In the future we’re going to talk a lot more about your company’s 401k program. However you probably are trying to get out of debt now and don’t feel like you should contribute to your 401k.

That’s ok. However there’s one exception: if your employer matches your contributions.

If your employer matches the first X of your contributions, you should contribute that amount. If you don’t, you’re leaving money on the table.

So set your contribution amount to whatever maximizes your employer’s match.

They’ll ask you which fund to put your money into. If you aren’t sure, a good safe default is to pick a “Target Date” fund named after the year you plan on retiring. We’ll explain that more in the next chapter.

The 401k is going to be a big part of how you save for retirement. The sooner you activate your 401k, the faster you’ll be able to retire. Get started now even if you are in debt.

Early in my career I was struggling financially and I didn’t contribute much to my 401k. I missed out on my employer’s matching (which was free money!) and years and years of interest. Damn. I’ve calculated that this cost me about $150,000. That means I could be retiring a year earlier. In hindsight, even if I was struggling financially I could have afforded the 401k payments if I had just decided to eating out less often or if I had brownbagged my lunches. Don’t make the same mistake I made!