When to Start Contributing to your 401k?
At blooom, we are huge advocates for starting to save early and often for your retirement. We are commonly asked the question – I still owe money on my student loans –is it OK to start contributing to my 401k?
Often times people are advised to pay off all of their debts (other than a mortgage) before beginning to save for retirement. I disagree with that strategy.
If you work for a company that offers a pre-tax retirement savings account like a 401k, 403b, or similar AND that company offers a match based on your contributions I think it would be foolish to pass up this free money while you are busy paying off debts. You would be missing out on a guaranteed return on your money by not contributing to your 401k. If you are still saddled with student loan debt, credit card debt, car loans, etc – my advice would be to contribute just enough (and not a penny more) to get the maximum match from your employer. All other excess funds should be aggressively applied to paying down your debts from smallest balance to largest balance – the Debt Snowball method that Dave Ramsey has advocated for years. Once these debts are paid off you can ratchet up your contributions to 10% or more.
If your employer offers a match, commonly it will be structured where they will match 100% of the first 3% that you contribute and 50% of the next 3% that you contribute. Therefore, if you contribute 6%, you will get a 4 ½% match from your company. While you are paying off debts – our advice would be to make sure you are contributing exactly 6% in this example.
As I have previously mentioned, the 401k (or similar) is one of the final frontiers left in terms of being able to use pre-tax dollars for your own benefit. I would really hate to see you miss out on this, the employer match and the 3, 4 or 10 years worth of compound growth in your 401k while you are working to pay off your debts.
Prior to blooom he co-founded another investment advisory firm that grew to manage over $500 million for clients. At blooom, Chris leads the company in building innovative financial services to reach a brand new audience of under-served Americans. Blooom has been named one of the world’s most innovative companies by Fast Company, and Chris was selected as “Ten to Watch in 2016" by WealthManagement.
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