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.

Chris Costello

Chris Costello is the CEO and Co-Founder of blooom - one of the nation’s fastest growing robo-advisors aimed at helping millions of underserved retirement savers. Chris has earned the prestigious CERTIFIED FINANCIAL PLANNER™ designation and has been working with individual clients and building portfolio allocations for over two decades.

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.

Latest posts by Chris Costello (see all)

Ready to grow your 401k?

Related Posts
Why People Fail at Flossing and 401ks
Your 401k is Not a Hermit Crab
A Penny And 401k Fees Both Overpriced
Penny for Your Thoughts: You Pay More For 401k Than You Think