Nobody is perfect and everyone makes mistakes. Whether it is accidentally forgetting the sugar in a chocolate cake recipe or hitting the curb when parallel parking, it is human nature to blunder every now and then.
Some mistakes, such as mismanaging your finances, occur at a greater cost then others. By avoiding some common 401k mistakes, you can help mitigate your chance of a serious financial fault from occurring.
Mistake 1: Not taking advantage of your company’s 401k
The first, and most common 401k mistake, is not taking advantage of this company benefit.
Many times employee benefit packages come with the added perk of a matching 401k contribution by the employer. The limit the company will match is capped, but if you do not make any distributions into your 401k plan, you are basically passing up free money from your employer.
Mistake 2: Not taking advantage of the market
Once you have gotten your 401k plan, the next error that can commonly is not knowing how to take advantage of weak markets.
When the markets and the ultimate 401k value is down, many people shrug off the value of the 401k and decrease the amount of their contributions. However, by actually increasing the amount you will be able to invest in more opportunities like lowered company stock value or other offerings included in your portfolio. When the market eventually rebounds, you will reap the rewards of this prudent strategy.
Mistake 3: Not knowing what to do when you leave your company
When you leave the company you can leave the money as is or opt to roll it it into an IRA. Either way, the money will rebound at about the same speed in either one of those options.
Mistake 4: Not diversifying
In financially turbulent times, many people seek lower risk investments to ensure that they still have money at the end of the game and may avoid their 401k for security reasons.
In the long run, the rate of low risk investments may not keep pace with the average inflation rate of 3%. Having a diversified portfolio including a 401k with some riskier investments is the best way to increase your chances of turning a profit and exceeding the inflation rate.
When it comes to maximizing your 401k, it is important to utilize and tap into your best investment options. Make your decisions independently and free of bias to avoid making any common 401k mistakes.