2 answers

What is a 401K and should I apply for one in my first job?

Asked Anderson, South Carolina

As I prepare to go into my career, I know insurances and benefits are a huge part of accepting a job. I have never really understood what a 401K is and if I need to apply for it! #401k #insurance #interviews #job-applications

2 answers

Chris’s Answer

Updated Chicago, Illinois

A 401k is a program offered by some employers that allows you to save for retirement.   Many times your employer will also contribute to the account.  This type of investment account can have some nice tax advantages also.


I highly recommend starting early when saving for retirement.  We can't be 100% sure Social Security will be available when we retire.   The money you put in now will have the advantage of time.   In the long term your money will most likely grow.   If you invest $1,000 at the age of 22 it could be worth over $52,000 by the time you hit 68.  (This is assuming a 9% investment return over 46 years)


Time value of money is on your side when you are young!  Invest what you can and watch it GROW! 


There are many future value calculators out there online.  Check them out.  You'll see just how powerful the time value of money is. 


There is also a simple investment rule of thumb out there called the Rule of 72.  This basically says to divide 72 by the rate of return on your investments to see how long it will take to double. 


So let's say you have a 9% rate of return.  Your investment will double roughly every 8 years. 



Chris recommends the following next steps:

  • I suggest you do some research on the time value of money. See just how powerful that is. How investing early gives you a tremendous advantage when saving money
  • Also look up compound interest. Those that understand compound interest will earn it. People who don't understand compound interest will pay it. Try not to pay it.
  • I think of saving and investing as financial self-defense. Game plan where you want to be in 10, 20, 30 years. It seems like a long way off, but I SWEAR it isn't. Understand finances and budgeting. You will have a better opportunity for financial freedom

Scott’s Answer

Updated

A 401k is a pre-tax retirement investment. It allows you to prepare for retirement and most companies will match the first 3 to 6 percent- free money. You can contribute up to 18.5 thousand annually and my recommendation is that you start contributing your first check. How much you contribute is up to you but make sure you know your company matching rules as you want to, at a minimum, contribute enough to get the entire company match. You will never regret saving for your retirement and you will be amazed at how it eventually grows. Good luck!!