How To Build Up Your 401(k) Balance From Scratch
Written by
Cindy Lamothe
Edited by
Chris Cluff
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It’s easy to feel overwhelmed by the task of building up your 401(k) from scratch; but, according to money experts, the most important component to doing so is to simply start.
“Retirement is most likely the most significant financial objective that any of us will ever have, and we don’t get a second chance to prepare for it,” said Jonathan Merry, finance expert at Moneyzine.
For that reason, it’s important to make good 401(k) decisions. While there are numerous ways to go about it, here are some ways to get you started.
Contribute to Your 401(k) as Early as You Can
Early in your career, a little extra effort can go a long way, Merry said.
“Don’t put off saving until your prime earning years,” he said. “You’ll have more time to save, more time to take advantage of 401(k) matching contributions, and more time to reap the benefits of compounding interest if you start early.”
Learn About Your Company’s Benefits Plan
One of the first things you should do, according to Josh Michaels, finance specialist and CEO of Money4Loans, is to become acquainted with your company’s 401(k) plan.
“By learning about the plan’s features, investment options and employer matching contributions,” he said, “you can make informed decisions that maximize your retirement savings potential.”
He said to not overlook the opportunity to grow your wealth through tax-advantaged investing such as your 401(k). As it’s one of your most valuable retirement savings tools, it’s crucial to have a full understanding of it.
Raise Your Contributions Gradually
Gradually increasing your 401(k) contributions is a smart strategy for long-term financial security, experts say.
This way, you’re spreading your investments over time, lowering the impact of any market volatility. It also won’t strain your budget.
“Ultimately, gradual contribution increases can help you build a more substantial retirement nest egg while maintaining financial flexibility in the present,” Michaels added.
Push Your Savings to the Limit
Often, investing money leads to earning more, Merry explained, and this holds true for your 401(k). He said to make sure to adjust your budget to prioritize retirement savings and strive to set aside at least 10% of your earnings. If you can, saving 15% or even more is even better.
Take Advantage of Your Employer’s Match
“If your company provides a matching offer for your 401(k) contributions, ensure you pitch in enough to fully benefit from this match,” Merry recommended. “Let’s say, for example, your company pledges to match half of what you contribute, up to 5% of your annual income. So, if you have a yearly income of $50,000 and you deposit $2,500 into your retirement account, your company would add an additional $1,250.”
He said to think of it as bonus money. “It’s wise not to miss out on it.”
Live Within Your Means
To many people, this may seem obvious, Merry said, but for most, this is something they deliberately consider.
“Someone who earns $50,000 per year and spends $40,000 is far better off in the long run than someone who earns $100,000 per year and spends $102,000,” he said.
He added that it’s not uncommon to see people with high-paying jobs, shiny cars and extravagant lifestyles who are drowning in debt and fighting to make ends meet. “People who live modestly often have a higher level of wealth as a result of saving and investing over time.”
As a general rule, Merry said, you should strive to set aside 20% of your salary for the future. “Savings should be invested, which will lead to long-term wealth building.”
Always Have an Emergency Fund
“While the traditional advice I give is to set aside six months’ worth of living costs, considering inflation and other unforeseen factors today, it might be prudent to aim for about nine months of your net income,” Merry advised. “Starting one might seem daunting, so start with a smaller goal — perhaps save up for a month’s rent or mortgage, along with insurance deductibles.”
He noted that an emergency fund will be your financial cushion for worst-case scenarios so you won’t fall toward a debt trap and struggle in the end.
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