In my last post I discussed free money. It’s interesting that yesterday a conversation started with an employee about to leave the company in search of higher pay. The conversation started and somehow drifted towards the 401k contributions of the company. She had made a statement about setting up her 401k on her first day but never looking at it after that. She was putting in roughly 10% of her salary and had a decent amount of money in her plan. Yet, she was not diversified and her gains here not much better than a mutual fund. This lead into conversation about active trading, research and monitoring. I don’t think it’s right that companies put people on the spot their first day of in processing through Human Resources. I see it time and time again, where people just randomly select funds to allocate their contributions towards and never think twice about it.
I’ve been reading many books lately on stock analysis, investing, and research. This actually makes me different from many people. It’s surprising how many “I don’t know” responses you get to simple financial questions while randomly interviewing people in the streets. Most people don’t want to put the time or the effort into the research. Instead they want to check a few boxes on their first day and forget they are putting 10% away. In a way though, it’s more than others do. After all it is getting people to at least save a percentage of their income. I figure that’s got to be good for something! While most people are complacent in letting it ride I’m not. Here are a few points to help manage your 401k and get you on a track to earning more than 1% above inflation:
* First Things First - Check it! That’s right Log in, realize you have the 401k in the first place and put it in your head. As I stated many people forget they have it. At least they are saving but, they could be doing better. Aside from t hat, what if you are actually losing money? If you never log in to check it, never open the envelopes to check your financial sheets you could be losing money with the funds you selected on that first day.
* Review your contributions - How much are you allocating? Are you allocating under 10%? Can you afford to increase the savings? The more you save now while your in your twenties the more compounding interest you have to grow over time. You may also be contributing less than what your employer would match. Referring back to my free money post from earlier this week it would be wise to put in enough to get the full employer match.
* Do your research - Before you start making changes in allocations you should research the funds first. Many people base their investments off historical data. A word of warning, the fund MAY have had a 10 year historical return of 12%, but It surely is not a guarantee that it will continue. In some of the books I read it is pointed out how some funds advertise certain things, and don’t deliver after they have established the customer base.
* Review your allocations - Where is your money going? My former employer contributed their match to my 401k in the form of company stock. Does anyone recall the Enron incident? Yes, so do I which is exactly why I reallocated all that money into something else. I also set it up so their contributions would be automatically sold every 6 months and transfered into the diversified investments I set up.
* Step it Up - I’m not a financial planner, or investment advisor so it’s important to fully understand what you are doing when investing and understand that you are subject to some loss even if you play your cards carefully. The point of this bullet is in your twenties it doesn’t make sense to have your 401k fund in bonds. You should step it up as you have time to recuperate any loses you may encounter. My personal fund is set up fairly aggressive. As a result of this, last year my 401k gave me a return of 26%. Try getting that with Bonds!
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[...] their employees. As our readers know, the 401k has been a topic of discussion on our website in the past. We covered the basics about the “free” money, as well as the advantages to younger persons; [...]