As girls, it’s critical that we take advantage of every opportunity to grow our wealth so that we can have the option to leave a toxic job, the flexibility to walk away from a bad relationship, and the opportunity to reduce our financial stress and anxiety by growing our investments for our future selves.
401(k) plans can be an amazingly effective tool to help you save for your retirement and grow your wealth. Without learning how to maximize the opportunity of your 401(k), you could end up leaving a significant amount of money on the table.
While your 401(k) can help you build wealth, there are fees associated with this retirement plan and unfortunately the average American will spend $~138,000 in 401(k) fees over their lifetime. For some people, this adds up to a few extra additional years they will have to work before retirement.
The good news is that there are ways to reduce these fees once you learn the basics of investing.
If you have a 401(k), you are an investor. Your contributions are invested in the stock market so it’s your responsibility to learn the basics of your 401(k) and how to invest. This post will help you get started!
Before we dive into the ways you can save and make more money from your 401(k), let’s review why this tool is so valuable.
There are 3 key advantages that make your 401(k) a valuable financial tool for your future:
1. Tax savings: Contributions to a traditional 401(k) plan are made pre-tax, which means that you can reduce your taxable income in the current year by the amount you contribute. This can help to lower your tax bill and increase the amount of money you have available to save for retirement.
2. Employer matching contributions: Many employers offer matching contributions to their employees' 401(k) plans. This means that the employer will contribute a certain amount of money to your 401(k) plan for every dollar that you contribute, up to a certain limit. This can be a great way to boost your retirement savings and increase the overall value of your 401(k) plan. This is part of your compensation so take advantage of it!
3. Convenience: 401(k) contributions are easy to set up and manage, and many plans allow you to make contributions automatically through payroll deductions. This makes it easy to continue to grow your wealth.
To make the most of your current and former 401(k)’s so you can stop leaving money on the table, you’ll want to tackle these three things first:
1. Contribute as much as you can to your 401(k) plan on a regular basis. The more money you contribute, the more your savings will grow over time. This money is invested so the more money you contribute, the more money you have available to compound over time. If your employer offers a matching contribution, make sure to contribute at least enough to take full advantage of the match.
2. Consider selecting the Roth 401(k) option if it is provided. A Roth 401(k) is a type of retirement savings plan that is similar to a traditional 401(k), but with a few key differences. Contributions to a Roth 401(k) are made on an after-tax basis, which means that you do not receive an immediate tax benefit for the money you contribute. However, the money in your Roth 401(k) account can be withdrawn tax-free in retirement, which can be a significant advantage in some situations. Be sure to check with your employer if this option is available to you.
3. Learn exactly how to select low fee investments. If you have a 401(k), you have the opportunity to select your own investments. Every investment you choose has something called an expense ratio, which is the operating cost of any fund. Choosing funds that have lower fees can help you save a lot of money over time. One thing to note, target date funds often have higher fees than other mutual or index funds. If you don’t know what you are invested in, you are likely in a target date fund, which could be charging you high fees.
Once you’ve mastered these 3 things, the next key step for you will be to make sure you are prepared to manage your 401(k) once you leave your current job.
When you are working for an employer, you are paying 401(k) administrative fees that you can get rid of once you leave your company. To learn more about how to save money when you are leaving your job and what to do with a 401(k) you still have with an employer, check out this free 401(k) checklist to help you make the most of your 401(k).
Mastering these few tips could save you thousands of dollars over time. While various fees for funds and administration seem small at first, even a fee of .5% can reduce your retirement savings by thousands of dollars. Investing is not as complicated as we’ve been led to believe. You can start building wealth with a little bit of education.
To learn more about how to grow your money using simple investing strategies that anyone can do (even if you’re brand new), visit wealthwithtess.com and follow @wealthwithtes and instagram and tiktok.
Author: Tess, is the founder of Wealth With Tess, an online financial education platform helping girls build wealth using simple investing strategies anyone can do