In my upcoming book, I provide you a step by step guide to investing in an employer-sponsored 401(k). You may ask, ‘why focus specifically on the 401(k) instead of, let’s say, investing in general or an Individual Retirement Account (IRA)?’ I zero in on the 401(k) because it was the first investment account I got started with, and it opened up my eyes to the fascinating world of investing. For me, it is what I like to call a “gateway investment account.” The 401(k) is a great way build your DIY investing knowledge, mentality and capabilities, as well as to provide you the opportunity to get your feet wet to move on to more investing accounts and investing success in the long-term.
In 2016 alone, I made $35K investing through my 401(k) without even lifting a finger. Here’s how I did it, and here’s how any Millennial can do so too:
- Set it and forget it. This phrase, “set it and forget it,” is a popular one among the financial community. One benefit of your 401(k) is you get the opportunity to select how much you want to contribute each pay period. I advise that you invest at least your company match (if offered one) or more (10-15%). Once you select how much you want to contribute, your contributions are deducted from your salary each pay period. And if you’re contributing up to your company match, your employer is automatically depositing free money into your account too. You quite literally set it (i.e. the contribution rate) and forget it (i.e. you’re good to go since your employer/employee contributions are automated). Last year, I set my contribution rate to 15%, and all was taken care of for me. I didn’t have to lift a finger.
- Invest in the stock market. Another benefit of the 401(k) plan is you’ll have access to mutual funds that invest in the stock market, which can give you exposure to higher returns. Investing in the stock market can seem a bit scary to some Millennials. I was in college during the Great Recession of 2007-2010 when the stock market nose dived in 2008, losing 38% of its value for the whole year. That’s a big dip in one’s investment portfolio, but it’s important to confront your fears. Looking objectively at the stock market data in the years after, you’d see that not only did those who stayed invested after 2008 make their money back but even more so. In the long-term (40 years plus), the stock market returns 8%, which is more than you can get investing in safe assets like cash or bonds. I am invested completely in the market to give me the highest returns possible given my age, time horizon and risk tolerance. In the last two months alone of 2016, the stock market rallied after almost 1.5 years of slow growth, giving me a year end 401(k) return of 9.6%.
- Don’t quit during rough times. The stock market overall has risen since 2010 but could get shaky again. In fact, returns flatlined in 2015, nose diving in August of 2015 and then again in early 2016. But under no circumstances are you to take money out of your 401(k). Those savings are there for the long-haul to accumulate and to provide you with retirement income when you eventually plan to step away from the 9-5 grind. Remember that when you are an investor you are in it for the long-term – during the good and the bad. Don’t panic when the times get tough but stay the course. My father loved the British saying, “Keep calm and carry on.” Take those words to heart. I have never once taken a loan or withdrawal from my 401(k).
- Employee contributions: $16,000
- Employer contributions: $8,000
- Market gain: $11,000
- Total: $35,000
For these very reasons, and for the sake of your financial peace of mind, if you have access to an employer-sponsored 401(k), then without hesitation promptly invest in the account to build your wealth and to build your DIY investing strength. You can’t afford to say NO. Instead say YES to yourself and to your 401(k) today.
Stay tuned! To get this blog started, I’ll be taking inspiration from my upcoming book, From Millennial to Millionaire: DIY 401(k) – 5 Do-It-Yourself Steps for the Digital Generation to Design and Manage their 401(k), to write blog posts. My new book should be available in eBook and paperback on Amazon by summer 2017.