The Easiest Way to Save: Automatic 401k Contributions

Posted on 16. Aug, 2007 by in Saving & Investing

As if you needed another reason to start a 401k, I’ve got another one for you. Just recently, my employer did something I wish others would – after 1 year of employment (when the company begins matching your contributions), you are automatically enrolled into the company’s 401k program. You can opt out, of course, but by default all new employees are enrolled.

And after seeing my first paycheck after enrollment, I have come up with one more reason why enrolling in a 401k plan is a good idea: forced savings.

401k.jpgTo be honest, it’s hard for me (and many of you I imagine) to write a check for $500 each month to a bank or broker to put towards your retirement. But if you never had that $500 to begin with, because it was automatically withdrawn, then you wouldn’t feel the “pain” of writing that check.

And sure it hurts during the first month or two every time you look at your smaller paycheck; but after a while, you will forget about it – just like you forgot about your healthcare deductions, life insurance deductions, etc. You and your monthly budget will adjust, and you’ll be on your way to saving for retirement.

And, if I can throw one more word of advice in regarding retirement savings, I recommend putting most, if not all, of your annual raise right back into your retirement fund. If you’re contributing 6% now, and you get a 8% raise come Christmas, then keep 3-5% to keep up with increased living expenses (like rent), and then increase your contribution percentage to 9-11%. If you can keep that up you’ll continue to live within your means while building quite a nest egg.

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2 Responses to “The Easiest Way to Save: Automatic 401k Contributions”

  1. Moneymonk

    16. Aug, 2007

    This is a no brainer, a 401k forces you to save because you don’t see the money.

    But still there are people that just do not sign up

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