Almost a year ago, I landed my first “career job.” After a year of barely making ends meet, it was a relief to have a small, but steady, paycheck. Even more exciting than the reliable paycheck was getting my first benefits package. Upon receiving my offer letter, I behaved like the millennial I am and immediately looked at my vacation time.* Once that passed muster, my eyes scanned down to the insurance plan and the option to sign up for a 401(k).
As a woman who loves to save money, the 401(k) grabbed my attention. I didn’t know much about 401(k) accounts at the time, but I did know it meant funneling money out of my paycheck into a “safe” location in order to develop a nest egg for retirement. Word on the street, a 401(k) was far better than a savings account. (Finance experts and other personal finance bloggers may feel free to say, “DUH!” right here.)
The 401(k) my company offered included a 100% match to 3% and then a 50% match on the next 2%. Essentially, I would get “free” money for tucking 5% of my paycheck into a 401(k). Upon further inspection, I learned we even got a choice between a traditional and Roth 401(k).** After consulting with my father about investment options for my 401(k), I made my choices, deferred a percentage of my paycheck and patted myself on the back for being responsible.
Three months later it dawned on me to check my 401(k) account. (Another moment for people to smack their foreheads in frustration with my rookie ways.) After fiddling around with my username and password combo a few times, I finally made it to the wealth management dashboard. I clicked around on the dashboard until I stumbled upon my account statement. I proceeded to do a dramatic Breakfast-Club-style fist pump at my desk. Without paying much attention, I had savings! It seemed like magic!
(Screw you Jersey Shore. THIS IS A FIST PUMP!)
In the past year, I’ve been shocked by the number of (employed) millennials not taking advantage of a 401(k) or failing to contributing to an IRA. Some have said they don’t want to contribute a percentage of each paycheck because they’d rather be able to spend it now. Other claim they need those extra dollars to put towards loan payments. The worst reaction are the handful who are too apathetic to go through the process of setting one up.
Choosing not to invest in a 401(k) in an employer matched 401(k) is essentially throwing away money. If you work for a company with a 401(k) offer and are not taking advantage, please, go in tomorrow and at least defer up to your employer’s match.
For millennials confused about 401(k) and IRA retirement accounts, stay tuned. If you have questions you’d like to see addressed, please include them in the comment section or tweet/email me.
*I hate to brag, but my company offers four weeks for your first year. It goes up to five after a year. Who am I kidding? I love bragging about my vacation days!
**Check back next week for part II in this series, which will include the difference between Roth and traditional 401(k) accounts.
26 responses to “A 401(k) Restored My Childhood Belief in Magic”
I second your feeling of joy the first time I logged into my 403(b) account and “found” savings I hadn’t been actively thinking about. Losing that 403(b) contribution has been the biggest downfall of choosing a part-time path. I’m most fulfilled when I’m cobbling together a career and working for various entities at once, but my “magic” savings account is not.
BTW, your vacation time is quite amazing. Definitely something to brag about!
Thanks, Rebecca! Did you roll over to an IRA?
The vacation time is indeed amazing! In fact I’m taking advantage of it right now!
Wait… I was barely out of diapers when The Breakfast Club came out. How do you know what that is?
As for the 401(k), I agree; even with the massive debt I have, I don’t even touch it before I take any free money off the table.
Here’s one more thing: In a crazy way, that 401(k) is even a better place to stick emergency funds. You’re putting in 5% and getting 9% after match which is an immediate bonus of 80%. If you make an early withdrawal because of some emergency, you have to pay a penalty of 10% + your fed tax rate (I’ll guess yours is 25%) + your state tax rate (1%ish) = 36%, so you still come out ahead.
(p.s. Does your match happen immediately or does it take a few years to vest?)
To explain The Breakfast Club reference, the TV channels I had access to in Japan were a solid decade to 15 years behind. My US pop culture knowledge primarily hinges on anything starring Molly Ringwald or Michael J. Fox.
And the match happens immediately. I do need to address an early withdrawal in future posts!
Happy Birthday Broke Millennial !!!!!
Xie xie ni, Baba!
Gotta love that free money! That’s a pretty good match as well. Do they give you the match with each pay period, or are they making you wait til year end to receive it? Four weeks of vacation to start out is awesome btw! Looking forward to your post next week.
You know what John? That is a good question. My gut says each pay period based on what I’ve seen accrue, but I’d have to fact check.
I thought I was the only one who thought it was magic! When saw that my employers money had been deposited into my account I did an audible evil genius laugh. Its crazy that my friends are too lazy to worry about it. I realize that im a super nerd whenever I start talking 401k or ira and my friends faces glaze over… great post!
Evil genius laugh! That’s fantastic!
I’ve started shoving IRA’s down the throats of all my friends who don’t have a 401(k) option. I know I’m being annoying, but I’m convinced they’ll thank me later.
30 days of annual leave. Enough said.
Good advice B. Its a shame to throw away money. But do you know what the biggest ass-kicker is with 401ks? Most people cash out their accounts between jobs. That’s truly throwing away money when you take into account the taxes and fees!
I overheard a conversation in my office’s kitchen about just this situation. One girl hadn’t bothered to roll her old 401(k) over and shrugged off losing 3 grand! I just turned and walked out before I said something too harsh.
Great work getting started so early! It’s really pretty amazing how quickly your savings grow when you put them on auto-pilot. Johnny is spot on about the issue with cashing out between jobs. Rollover into an IRA!
Something to be addressed in a future post! A guy I work with borrowed against his 401(k) many years ago and is still paying taxes on it!
I wished my company matched any retirement savings! Good for you for taking advantage of this from day one! I only get 3 weeks paid vacation.You lucky ducky 😉
Awesome!! Hopefully, your 401(k) offers some decent choices (mine stinks). Even if they aren’t the best funds though, you can’t beat the 100% return from the employer match.
I wish I had the option for that, but thanks for providing more information. This will be useful when I’m looking into jobs!
I’ll let you in on a little secret, it’s not just millennials who check out how much vacation time they have before everything else! 🙂 I’m glad, but not surprised, that you immediately enrolled in your 401k plan. Company matches are wonderful and it makes me sad how many people don’t take advantage of that free money. Good for you for being on top of it and you’ll be the one laughing on her way to early retirement!
Woohoo for free money!!!
I can’t help but shake my head at people who do not invest the 5 or 6% that company’s will match for your 401k….I just don’t get it! Even worse is we have an employee stock purchase program that goes in six month time periods. They purchase at the LOWER of the two prices…at a 15% discount! Yes, even if the stock tanks you still get a 15% bonus essentially every six months. You can put up to 10% of your paycheck into it. There is essentially no downside. You can sell the stock right away, and if the stock doubles in price you REALLY win because you essentially make a 100% return (this basically happened at one point). I personally have talked to a friend about this at length and he still opts out of the program. It’s hard to believe…In fact I am ripping my hair out just thinking about it!
I felt the same way with my old employer’s pension plan. I’d put in 6 percent, they matched that 6% + 2.5% and magically, I had gobs of savings. 🙂 Company matches are great!
Why can’t I virtual-like this post? I wish I had three hands so I could triple like it!
Ok, between you and Mario, I’m feeling a bit old! I was just out of high school when the great John Hughes (dir.) movies like The Breakfast Club came out. :-). But seriously, Broke Millennial, you are doing awesome, and come retirement time, you’ll be hooked up BIG and be SO glad you took advantage of the “magic” of the 401k. Great job!