A common question many Foresight advisors are asked, is How much should I contribute to a 401K People know contributing to a 401K is important, but they are not sure how much they need to contribute. When deciding what your contribution should be, there are a number of factors to consider:
1-Start Contributing As Soon As You Start Working As soon as you start working, you should be contributing to a retirement fund. If you have been working for some time without contributing to a 401K, you may want to increase your initial contributions to make up for this lost time. Remember your financial ABC’s- Always Be Contributing.
2-Max Out Employer Matching Many employers match employee contributions up to a certain percentage. Make sure that you are contributing enough to max out your employer’s matching contribution. This is basically free money so it doesn’t make sense to pass it up even if you are in debt.
3-Select A Saving Percentage and Stick To It There are differing ideas on how much you should be saving versus spending. A general rule of thumb is 80/20 (80 percent spending and 20 percent saving) or 75/20/5 (75 percent spending, 20 percent saving and 5 percent giving to charitable organizations). Regardless of what percentage that you choose to put toward savings, stick to it! It can be easy to overspend in any given month because there’s something that you really want to buy. Don’t fall victim to instant gratification too often. In the long run, you’ll be glad you stuck to your savings plan.
4-Divide Up Savings Diversify your savings and retirement plan. You don’t want to contribute all of your savings to your 401K because if you need to access or borrow from it before retirement, there’s a penalty to take it out early. Consider instead, splitting your savings between an emergency fund and your 401K contributions. This will ensure that you have enough liquidity in your assists should you need money earlier in life.