When I first started working at the age of 24, no one told me where to put the money I had left over after paying my bills. I just left my money in my checking account and let sit it there. By the time I was 26, I had around $50k saved up in my checking account.
You would think that this is a good thing but that amount of money is rotting away due to inflation each year. In addition to the inflation, I could have invested that money somewhere else. By the time I was 26, I had $0 invested for the future. If I had invested, that $50k could have grown to somewhere near the 6 figures region.
In this blog post, I will show you what I wished someone would have advised me to do in the past: how to invest money for the future. Even more so, I want to show you how to maximize your investment.
Let money, make money.
- LitCoupon
401k Matching
When you first start working for an employer, that employer may have a 401k plan for their employees. A 401k plan is a retirement savings account that allows an employee to allocate some of their salaries into stocks, bonds, money markets, and other investments. There are advantages and disadvantages to putting funds in a 401k plan. I won’t be discussing them at great lengths here since I want to get straight to the point.
Many employers provide 401k Matching. This means that if your employer offers 401k Matching, then they will also contribute a certain amount to your retirement savings account based on the amount you put in.
Here’s an example. Suppose you work at LitCoupon and we have a 401k Matching policy that states that we will match up to 4% of your salary towards your 401k contribution. Now suppose that you make $2,000 biweekly. Now if you contribute $80 every biweekly paycheck to your retirement savings account, we will also put in $80 into the plan. So you gained $80 for “free”. Keep in mind that $80 is at 4% of your salary, so you will not get more than $80 in matching if you go over that contribution.
Think of 401k Matching as free money from the employer that you can put into investments. Your 401k plan should have some default configuration for your investment allocation. Note that you may not have full control over what your 401k plan invests in. This is often the case but it is not necessarily a bad thing to rely on funds selected from reputable finance institutions.
If your employer offers 401k Matching, this is the first investment you want to max out. You want to put in as much money as you can up to what the employer will match. Do not put any more than that yet. We will circle back to putting more money into 401k later on.
Also keep in mind that there are two types of 401k plans: Traditional 401k or Roth 401k. If your employee has 401k Matching for both Standard and Roth, then you should select which 401k plan you want to put money in depending on your situation. Otherwise, I would focus on putting money in the plan your employer matches solely in.
Roth IRA
A Roth IRA is a retirement savings account that allows you to withdraw your money tax-free. Like the 401k plan, there are actually two types of IRAs you can put money into Traditional IRA and Roth IRA.
One of the biggest differences between Roth IRA and the Traditional IRA is you must pay taxes when you withdraw from your Traditional IRA but with the Roth IRA you do not have to. This means that your investment gains are exempted from taxes when you withdraw.
If you are trying to maximize your investment gains, I highly suggest you put money into Roth IRA. Note that there are more strict rules surrounding whether or not a person can or cannot put money into a Roth IRA plan. This includes things like how much you can put in and the income limit.
source: https://www.fidelity.com/retirement-ira/contribution-limits-deadlines
After maxing out your employer contribution in your 401k plan, the next thing you want to do is to max out your Roth IRA contribution. The 2020 and 2021 Roth IRA contribution limit is $6,000 for people under the age of 50 and $7,000 for people above the age of 50.
There is an income limit and if you are above that threshold, then you can try a backdoor method to move money from Traditional IRA to Roth IRA.
401k Again
After maxing out your Roth IRA, I suggest you allocate the rest of your excess cash into a 401k up to the maximum contribution limit. This is for those who still do not need the extra money at hand for a long time. The 2021 maximum contribution limit for a 401k plan is $19,500 and an additional $6,500 for those turning age 50 or older.
Stock Market and Crypto Market
At this point, you should have some funds in your 401k plan and Roth IRA if it is not maxed out yet. If you still have excess cash or you just don’t want to max out the previous retirement savings accounts, then the next thing I would suggest investing in is the Stock Market and the Crypto Market.
Some of the advantages that investing in stocks or cryptos has compared to allocating money in a 401k plan or Roth IRA is that there are fewer restrictions:
- You can liquidate your holdings and withdraw your money without penalties.
- There are no limits to the amount of money you can put into the market.
- You are not limited to what you can invest in, unlike a 401k plan.
But on the flip side, there are disadvantages of investing in the market without maxing out your 401k plan and Roth IRA:
- You lose out on tax benefits.
- You might lose out on employer matching.
- You might lose out on some fund selections that you like in a 401k plan.
This is why I advise you on investing your money into stocks and cryptos after maxing out your retirement savings account. This way you squeeze out as many benefits to build a strong safety net in your retirement savings accounts before playing with the market.
The Stock Market and the Crypto Market is a giant topic to go over and I want to discuss this more in-depth in future posts. Please be on the lookout for new articles.
Conclusion
In short, this is the advice I wished someone would have told me in the past:
1. Put enough money into your 401k plan to max out your employer’s 401k contribution match only. This is literally free money. Do not put any more in than you need to just yet.
2. Max out your Roth IRA contribution limit. When you withdraw from your account in the future, you will not have to pay taxes.
3. Max out the rest of your 401k plan.
4. Invest money in the Stock Market and/or the Crypto Market.
I hope you find this piece informative and useful in your investment journey. Feel free to send a response on our contact page or comment on our social media accounts.
Thanks for checking LitCoupon out!
