If you’ve recently been employed—whether it’s your first job after graduation or a new job—one of the things you should start with is setting up your financial plan.
Your goal should be to secure your future, and there are some things you can do now to ensure that happens. Here are three smart money moves for the new hires.
1. Let your employer’s 401(k) match be your foundation
A 401(k) plan is one of the best tools for saving and investing for retirement. Aside from making pre-tax contributions and reducing your taxable income, one of the biggest benefits you can have is an employer match. Employers will often top up your contributions up to a certain percentage. Whatever your employer is willing to pay, the very minimum you contribute should be.
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If your employer matches 3%, your absolute minimum should be 3%; if it’s 5%, your minimum should be 5%; In any case, you should never contribute less than your employer is willing to pay. Otherwise, you are essentially leaving free money on the table, as an Employer Match is a guaranteed way to earn a 100% return on the amount.
If you make $100,000 a year and your employer matches 5% of your contributions, that’s an extra $5,000 a year if you contribute at least that much. The 401(k) contribution limit is $20,500 ($27,000 if you’re 50 or older), so it’s unlikely you’ll get that amount matched unless you’re in the top 1% of earners, but a Employer Match can take this into account a lot of money in your account.
2. Use a Roth IRA if you are eligible
One of the main disadvantages of a Roth IRA is the income limit for eligibility. If you’re single and earn less than $129,000, you can contribute the full $6,000 ($7,000 if you’re 50 or older). If you are married and applying together, you can pay the full amount if your income is less than $204,000. If your income is $144,000 or more ($214,000 or more if you are married and applying together), you are not eligible to contribute at all.
It cannot be overstated how beneficial it is to earn tax-free returns on your investments. If you put $6,000 in one S&P500 If you invested in a Roth IRA that returns 10% annually for 30 years, you’d have over $104,000 without contributing another dime. If that happened in a regular brokerage account, you would owe taxes on that amount when you sell your shares. But since it is a Roth IRA, the full amount would be yours. Take advantage while you can.
3. Set up automatic transfers
You can never go wrong by doing things that make your life easier. When investing, one of the ways to lighten your load is to take some of the work out of it. That’s why it helps to have money automatically deposited into your investment account, whether it’s a brokerage or IRA.
Having an automatic transfer set up not only takes one step off your shoulders, but it also makes it easier to get used to living without that money since you won’t have it in your bank account for long.
If you have the funds, you should aim to at least maximize the allowable IRA contributions. For example, if you plan to maximize your Roth IRA, you can set it to automatically transfer $250 from your paychecks every two weeks. Or, if paid once a month, you can transfer $500 each time. How often you do it isn’t that important; What is important is that you invest and work towards your future financial security.
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