Think Before You Dump...All Your Money Into Your 401(k)

Maybe I've just been noticing it more over the last few months or maybe it has really has undergone a new push, but it seems like everywhere I look I see the same three word phrase: "Maximize your 401(k)!" Just last week, CNN/Money reran an article about Smart Money Moves that included the quote:

Put as much as you possibly can into your 401(k).
Assuming a 7% return and a 50% match, upping your annual contribution by
a grand and maintaining that level for 30 years will add $153,110 (not a
misprint) to your nest egg.

I suppose most of this attention to 401(k)s is due to corporate America deciding, almost in unison, that it is fine to freeze all pension plans and put the onus on the individual employee to save for their future.

Perhaps I got lucky by only entering the workforce in 2000. Working at a small software consulting company I never had to worry about pensions, 401(k) was the only way to go. 401(k)s have numerous benefits. The money is gone before I ever have it in my hands, my company matches a portion of what I put in, and, best of all, I don't pay any taxes on it right now. Anyone who has the opportunity to invest in a company 401(k) should do so, as soon as possible, and should invest at least as much as their company will match to get the full benefit.

However, I don't necessarily agree that it's always a good idea to max out your 401(k). Why not? I think this because throughout a person's lifetime there are certain events that require planning and savings that could be harder to accomplish if all expendable cash is being pumped into a 401(k). For instance, I am saving right now to buy a house someday (after the housing bubble finishes bursting). A couple years ago I thought that I would be able to use some of the money in my 401(k) as a down payment on the house. Little did I know that that money is tied up and virually unavailable to me until many years from now. Sure, I could withdraw it now and pay a heavy penalty. I could even take out a 401(k) loan but then I would live in fear of losing my job and having to pay it back right away. Now that I am more knowledgeable I have scaled back my 401(k) a bit. I still invest enough to maximize my company's matching policy but now I put a little away into a decent interest-bearing savings account that I can use for that house.

So before you start investing in your 401(k), or even if you're already investing, take a step back and do some planning. If you can afford to maximize your 401(k) and still put a little away for other investments that come up along the way, by all means, do it! However, if you know of big investments coming up in the future just don't plan on using your 401(k) to fund it.

The Beginnings of My Financial Education

As I covered in my previous, and first, blog entry I am not a financial expert. So perhaps, at 28, I'm a little behind the ball in getting started with my financial education. I attribute part of this to the fact that I come from a family background where both of my parents are hard-working principals, one in an elementary school and one in a middle school. Their background in business is limited and therefore I didn't grow up in an environment where there was much discussion about business, finance, investing, etc. I don't harbor any resentments about this. My only wish is that they had someone teach them personal finance at an earlier point in their lives so that they could be in a better position today.

When I graduated from college and started at my first real job I took two important, but minimal steps. First, I immediately enrolled in my company's 401(k) plan and, second, I started to pay down my debt. I didn't do anything else because, frankly, I didn't know what else was out there. Over the next few blogs, I'll discuss each of these two points individually but for now I'll stick with the overview.

It wasn't until about six months ago that my real financial education began. By that time, I'd been out of college for five years. One day I picked up a book that had been gathering dust on my bookshelf, Rich Dad, Poor Dad, by Robert Kiyosaki. Now I know that many people have read this and the other books in the Rich Dad series and have varying views on the books themselves. That's fine with me. However, for me, this book opened up a whole new world of thinking. That book started my transformation from Joe Employee, saving a bit in a 401(k) and spending pretty much everything else, to someone researching, learning, and exploring new ways to make money everyday. You don't have to agree with everything that Mr. Kiyosaki writes in his book, but it has the ability to inspire and get you thinking about what could be. And, for that reason, I recommend it.

Financial Common Sense In The 21st Century

One of the comments that I will always remember from my dad growing up is, "Use common sense." A short comment, yes, but one that I feel is more important than ever when dealing with personal finance in the 21st century. I have created this blog to log my thoughts, note current events, and maybe even provide some guidance along the way about personal finance.

I am not an accountant, tax pro, certified financial planner, or anything of the sort. But, one thing that I am is a 28-year old trying to navigate my way through the forest of money options out there and trying to do the most with the little amount that I have.

I hope that if you read this blog and find something that you agree with, disagree with, or have questions about that you'll respond with comments. While part of this blog is to allow me to express some of my thoughts and distribute information, it is also my hope that this blog will allow me to learn new and better ideas to deal with personal finance.