Take The Free Money (Step 4: The Employer Match)
What if I told you there’s a way to legally and safely double your money, no questions asked? Sounds like a scam, right? But in this case, it’s not a shady crypto deal or a Nigerian prince. It’s real. And it’s one of the best investments you can make – The Employer Match.
Unfortunately this step will only apply to those who have a full-time job with a 401k (or TSP) that their employer offers a spectacular benefit of matching a predetermined amount of contributions. There are other great opportunities that part-time folks can take advantage of like the tax-efficient savings of traditional or Roth IRAs that we will cover in a later step. But today we are going to cover the mother-of-all investments – and one you should absolutely be taking advantage of before doing any other investing or debt paydown.
Double Your Money
The exact percentage matches and total amounts will vary by employer. Some employers match 50% of your contributions up to 10% of your salary, giving you a 5% benefit. Others might match 100% up to 5%, which also nets you a 5% boost. In either case, if you are not taking advantage of your full employer match benefit, you are leaving free money on the table. Not contributing your full match amount is like telling your boss, "Nah, I'm good. Just pay me less."
Some full match amounts may be more difficult to contribute than others, but try to think of it like this – Whatever the % match there is, that is your guaranteed return on your investment. Who wouldn't want a guaranteed 50% or 100% return on their investment instantly?
Is That All I Need?
Is the full employer match benefit all that you should be contributing to your 401k (or TSP) account? Will you be able to retire comfortably on that alone? The answer is most likely no. Generally, the rule of thumb for retirement contributions is to hit a total of 15% of your gross income in retirement contributions. As a federal employee I get a 100% match up to 5% of my contributions. So my first 5% is matched with another 5%. This is just 10% of my gross income, still shy of my goal! I would need to contribute 10% + the 5% match in order to reach my desired 15%. However, reaching this full 15% contribution will come in a later step after we have tackled all of our high interest debt. For now we are only going to contribute enough to max out the employer match!
Should I Be Investing This Early?
When I started doing research on the steps to financial independence and the efficient use of money, I was taken aback by the suggestion to start investing so early. We only just barely covered our Step 3: The Emergency Fund! What about credit card debt? Mortgages? Personal loans? Isn't the responsible thing to do to pay off debt first? I can almost hear Dave Ramsey screaming in the background with his scissors clacking.
We place this step so early in the process because of its level of guaranteed returns. In the long run, you will be far better off taking your 100% match of free money than starting to pay down your 29% interest credit card or any other debt. It was really hard to imagine at first, and it took me a while to fully grasp why. Once you realize that getting a 100% return is better than avoiding a 29% interest rate, it starts to make sense.
Paying off debt that is at a fixed interest rate is effectively investing in a guaranteed return for that amount of interest. Well, if we can invest with a 100% or even 50% guaranteed return, we should be doing that first!
We have dipped into more of a debt topic than I was originally planning, but I think that it is so important to understand why we are investing so early in our process. The guaranteed returns of The Employer Match are unbeatable.
The Employer Match might seem like a mundane decision on some HR paperwork when you first start working, but it's one of the smartest first moves you can make in the world of investing. You're not just saving money. You're maximizing it with zero effort. There's a reason they only match up to a certain amount! If your employer is helping you build your future, don't leave that offer on the table. You don't need to be an expert investor to snag those 100% returns, you just need to start with this one simple step.
Next up: Step 5: The Credit Card Debt