Finance Tip

I have been reading some finance blogs (my favorite of which is Get Rich Slowly), and have decided that I shouldn't let my vast knowledge of Finance go to waste, so here comes a Finance Tip:

401ks: A 401k is a special type of saving account where you can save money for retirement. Most companies should offer at least a 401k plan, and some companies offer matching (more on this below). The reason that 401ks are so valuable are that you can put your money into an account tax free. The taxes are deducted when you withdraw from the account, which assuming you don't withdraw the money until you retire, and if you are retired you probably are making very minimal income, your taxes on the money will be very minimal, as opposed to now when you are in a much higher tax bracket because of the money you are earning.

The key to a successful 401k plan is that you do not withdraw the funds until you need them, preferably when you retire. If you decide to withdraw the money, you will incur a penalty fee for doing so, AND you will have to pay the taxes on the money was well. This is not a wise choice. The IRS have made a few concessions to let people withdraw the funds penalty-free (but you will still have to pay the taxes) for things such as buying a home, if you or a family member get sick with something like cancer, etc.

I mentioned above that some companies offering matching to a 401k plan. Each company's matching program works differently, but let's say your company offers matching up to 3%, this means that if you put 3% of your revenues into your 401k plan, your company will MATCH that 3% that you put away. Did you get that - that's free money! When the recession hit, I know a lot of companies (mine included) took away the matching feature, but that's doesn't mean that you shouldn't utilize the 401k plan if there is no matching. Also, at the very bare minimum, you NEED TO at the very least be invested whatever you company is matching. If you don't then you are simply throwing away free money.

Another thing to note about retirement saving in general is that many people think that being in your 20s means that you don't have to think about saving for your retirement, that this is something you think about when you in your 40s or 50s. But this is exactly the time to be saving for your future. There is something called compound interest, called "the greatest force in the universe" by Albert Einstein, means that you are earning interest on the interest from the money you have in there now. I won't bore you with boring calculations, but basically it boils down to the fact that if you invest just a little in your 20s for your retirement, you will have a lot more money at retirement time than someone who invests substantially more but waits until their 40s to start For more information on this, read this.

For those of you who aren't already investing if a 401k plan, DO IT NOW. For those of you who already are, see if you could invest more. If you are not taking of advantage for your company's matching, DO IT NOW. Lastly, if your company does not offer a 401k plan, there are other alternatives such a Roth IRA or a 403b.

Hope you all learned something, and look forward to more Finance Tips!