National 401(k) Day – What To Do With Yours?

Dear Jack,

I just – and I mean as in the past 30 minutes – found out that there exists a National 401(k) day, and it is, in fact, being celebrated today.  According to http://www.401kday.org/, the official National 401k Day Website, the day exists to raise awareness of employer sponsored retirement accounts.  Just as retirement takes place after the working years, the day is celebrated just after Labor Day.

I think this is great – and brings me to think about my advice I give when telling people what to do with their own retirement savings, especially those who are younger in life.  Typical disclaimer: personal advice varies as everyone’s unique situations varies.  So take this for what it is: generic financial advice.

So, let’s create a hypothetical situation, for you.  Say you’re 27 years old, earning a decent salary, have a job that offers you a 3% dollar for dollar 401(k) match, and you have $10,000 in student loans.  You also have a mortgage, but no other consumer debt (auto or credit card).  My advice to you is to take advantage of your 3% dollar for dollar match, as you’re getting an instant 100% rate of return on your money, and aggressively pay down debt with any extra cash you have each month.

Even if you could afford to put 6%, or 10% into your 401k if you pay your minimum debt payments and other living expenses, I recommend just doing the match for now.  Some people may argue that the lifetime rate of return is greater if you invest your money (at say, hypothetically, 10%) than if you pay off your debt (again, hypothetically, at 5%) … but I’m going to say ignore that.  Why?

  • Because I’m more interested in pursing Financial Freedom – and you’re going to find more freedom in being out of debt than you will with a bigger 401(k) account.  The example I use regularly is say you have a $200/month student loan.  You then come across someone in your church or neighborhood who could really use a $200 anonymous gift.  But you can’t give that $200 very easily, because you have to pay that monthly student loan bill.  You’re enslaved to that lender (Prov 22.7), and you have to make that payment.  Compare this to making a $200 contribution to your 401(k) or Roth IRA – you can unplug that, even if only for a month, and make that anonymous gift and feel great about it.  You have the freedom to do so.
  • Additionally, there’s no guarantee that you’re going to get that said 10% return (and run, don’t walk, away from anyone who says they can guarantee a 10% return).  There’s a 100% guarantee, barring bankruptcy, that the lender will get their  5% return, compliments of you.  By paying off that loan, you essentially make an investment with a guaranteed 5% rate of return.

But once you do have your consumer debts paid off, I’m all for maxing out your 401(k).  Well, maybe maxing out a Roth IRA, and your spouse’s, and then with your excess cash flow going back to the 401(k) – but regardless, investing in some sort of retirement account.  I’m not really as worried about eliminating the mortgage before maxing out retirement savings – but do recommend paying extra on it as you can.

Happy 401(k) day, Jack.  Till next time.

Sincerely,
J.

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