Am I Ready to Invest in the Stock Market? Part Two
If you've gotten this far, you've likely already started a budget, and you have a reasonably sized emergency fund to cushion from the unexpected. See Am I ready to Invest in the Stock Market? Part One if you missed it! To add to your budgeting and savings goals, lets get into your first steps to start investing.
A 401K is a retirement account setup by your employer. You can use pre-tax or post-tax dollars to contribute to this account, and use this money to invest in mutual funds, bonds, and potentially individual stocks. Using pre-tax dollars (Traditional 401K) lowers your taxable income by deferring the tax liability of these contributions to the time you access these funds in retirement. Depending on your financial situation, this is a great way to lower your tax bill at the end of the year! Many employers, as part of your overall compensation package (yes this counts, whether you choose to benefit from it or not), will match dollar for dollar what you put into your 401K account...up to a certain percentage!
Check with your employer to find out your eligibility. You may have to work with the company for a few years before receiving a match, before becoming fully vested, or before receiving the full match. However, some employers meet their full match percentage and fully vest the match from day one! So be sure to check with your HR department.
Easy math example: Lets say you make $50K a year, and your employer matches up to 4% of your pay that you put into your 401K account. $50K x .04 = $2K. That's $2,000 a year from you, plus $2,000 a year from your employer into your account, making a total of $4,000 per year if you max out your match. You can of course contribute more (Up to $18K a year in 2015/2016) if your finances allow for it, but at the bare minimum you need to max out your companies match.
Remember, your employer will only match up to their stated maximum of what YOU contribute. If you don't contribute, they will match you dollar for dollar at ZERO! Using the example above, unless you're making $450,000 per year (of which 4% = $18K), your company will not match $18K for those contributing up to the max. But that is still $18K (or less) that you're liable to pay taxes on at the end of the year. Win Win!!
Think about this....a 100% return on your contributions (not considering market fluctuations) just for putting money into your 401K account, and lower taxes!!! Now if you're able to Self-Direct the funds in your 401K (choose individual stocks), then you get to kill two birds with one stone by subscribing and using the Share Repurchase strategy within your 401K. In our next post we will discuss Health Savings Accounts (HSA). Thanks for reading! Please comment and subscribe to the blog and newsletter!!
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Akeem The Dream
I enjoy discussing and learning about technology, stocks, sports, and beating my wife at Dominoes! As I learn, I love to share with family and friends so that we can share our knowledge. Thanks for being apart of the journey!