Mistakes are the best teachers. One does not learn from success. It is desirable to learn vicariously from other people’s failures, but it gets much more firmly seared in when they are your own. — Mohnish Pabrai
Some of life’s mistakes are more costly than others. One may not rear its ugly head until many years down the road, while another is capable of delivering an immediate knockout punch. Money mistakes are able to do both.
Odds are you’ve made some pretty good money decisions, and you’ve made costly mistakes as well. Nobody is immune from mistakes. None of us are smart enough, lucky enough or insightful enough to completely eliminate mistakes from our lives.
But you can take steps to improve yourself as a money steward and investor, and elevate the state of your overall financial wellness by minimizing the frequency and severity of your mistakes, learning important lessons from them and correcting course as necessary.
Not taking the free money.
As a thirty-six-year Certified Financial Planner professional and financial coach, it’s always stunned me when I run into those people who reject free money.
First, let’s examine a very simple concept as illustrated by this brief discourse:
Person A: “Can I give you free money?”
Person B: “No.”
It seems that we may be able to draw two conclusions from this exchange: Person A is either generous or has an agenda, and Person B is probably a jughead.
The good news is that there is a Person A: it’s your employer who offers you participation in an employer-sponsored 401(k) plan, and may additionally offer an employer match to your employee contributions.
There are now more than $30 Trillion in U.S. retirement assets, with 401(k) plans holding nearly $6 Trillion of that total. That’s a near doubling of 401(k) assets since 2010. While many people love these plans, according to the U.S. Census Bureau, only a third of all Americans are taking advantage of the free money. Two thirds are rejecting free money? They’re missing the lay up. They may be jugheads!
Okay, you may be thinking that some people need every cent of their paychecks to live on, and cannot afford to make 401(k) contributions. Maybe so, but it seems that just about everybody can budget their way into a position that allows them to get some free money, if not the max.
People who necessarily have to live “close to the bone,” are thinking about today, hoping that tomorrow will take care of itself, but sadly, life doesn’t work that way.
This is where clever budgeting comes into play. Everybody has something they can cut from the monthly outlay, some fat in the monthly budget that needs to be trimmed away.
How many people do you know continually moan about never having money? How many of them have a cable subscription? And the premium channels? Lease a fancy car? Never miss a meal out? Always decked out in the latest fashions? And on, and on.
At its root, retirement planning is about trading some today stuff for tomorrow stuff. It’s about delayed gratification. It’s about self-sufficiency and independent living. So, if you can qualify for free money, why wouldn’t you trim away some of the fat in your budget and plan for a brighter future?
As your personal financial mission, you should commit, at minimum, to contributing an amount that the employer is willing to match. When there’s an “employer match” it’s literally like stepping up to the “free money window.” For instance, if your annual salary is $40,000 and your employer matches the first 6% of your salary dollar-for-dollar, they are giving you $2400 for every $2400 you contribute. Yes, sometimes in life, there is such a thing as a free lunch!
“But I can’t afford to risk money in the market!”
OK, let’s suppose you did put $200 a month “in the market.” That’s $2400 a year. Your employer matches that with $2400. With me so far?
Let’s say you are the unluckiest person on the planet, and you select the world’s lousiest investment allocation that loses 50% a year (nearly impossible given all of the 401(k) plan regulations regarding investments offered). If that happened, you would still have $2400! Pigs WILL fly before this scenario ever occurs, but you get the point. You cannot miss the layup! Contribute to your 401(k). NOW!
You will never earn a risk free return like this. Anywhere! A dollar for dollar match means an instant 100% return, at the time the match is made. Will the 100% hold throughout the time you are in the plan? Probably not, but understand you would have to lose 50% on all assets to go underwater! And if history holds any clues (and it does) you will end up with more than 100% return on the matched portion of your contributions.
There are plans with lesser matches, but in the end, any employer match at any amount is still free money!
If your company offers both a traditional and a ROTH 401(k) option, go for the ROTH, where you will invest with after-tax dollars, but the payoff will be glorious!
Starting in 2020, the IRS announced that employees in 401(k) plans will be able to contribute up to $19,500 next year, but don’t expect your employer will match up to this limit. But who cares? Tax-deferred investing, or tax free if its a ROTH 401(k) is THE way ro build lasting wealth. The free money turbocharges this strategy. (The increase also applies to 403(b) plans, most 457 plans, and the federal government’s Thrift Savings Plan.) For IRS guidance on the subject, go here.
Here is a short checklist of things to do now:
- If you are not a participant in an employer sponsored plan go today to your company’s HR department and find out when you can enroll. Typically, its during open enrollment season in the fourth quarter, but there are some exceptions,
- If you are a participant, make sure you are at least contributing an amount that will get you the max match.
- If you can afford it, put even more into your plan.
- If your company offers both a traditional and a ROTH 401(k) option, go for the ROTH, where you will invest with after-tax dollars, but the payoff in the end will be glorious!
- Proper asset allocation is critical so fix the mix. Make sure your investment choices (asset classes and subclasses) fit your goals and your appetite for risk.
Do your homework, fix your current budget and go get some free money.
Do you really want to be Person B?