A 401K is one of the simplest ways for your money to grow. By making small regular investments starting in your 20’s your savings will grow over the next 30-40 years, easily making you a millionaire.
While just opting to put your investments on auto pilot is good, it’s best to have a strategy making the most of your 401k and maximizing your returns on your investments. Reaching that million dollar mark is a dream many Americans have. And I’m here to tell you it’s achievable, even for households that make less than 100k a year.
Here is a simple 7 step strategy to help you get the most from your 401k, and why you should be investing in your company’s 401k plan.
#1 Always maximize your employer match. Many companies have a 401k match up to a certain percentage. Some do a contribution up to a certain percentage, like for every dollar I invest they will invest a quarter. Now this doesn’t sound like much, but it’s free money, and you should never leave money on the table!
#2 Invest in stocks. Yes, this is the most volatile investment, but you have time to ride out the waves. High risk, high reward. Investing in mostly stocks in your 20’s and 30’s will maximize your returns. When you are closer to retirement, you can move your investments to a safer option like bonds.
#3 Follow the 80/20 rule early on. Your investments should consist of 80% stocks and 20% bonds.
#4 Meet with a financial advisor at least once a year. The stock market changes constantly. It is best practice to go over your investments at least once a year. You will need to move your investments according to their performance. During an election year, you should meet with your advisor at least twice. Stocks historically go down, and you may need to move then to a safer bet during this time.
#5 Regularly increase your contributions. As you grow in the company so should your contributions to your 401k. This will help lower your taxable income, keeping the money you earn in your hands not Uncle Sam.
#6 Balance your contributions with paying down debt. Don’t put so much into your 401k that you don’t have enough to really pay down your student loans, credit cards, or mortgage. Make sure you a paying down whatever has the highest interest. Interest is money wasted.
#7 Compound interest. I saved the best for last. By investing early, you are making the most of compound interest. Compound interest is the interest you earn on your investments every year added to your principal, allowing your investments to grow at an increasing rate year after year.