The Wrong Way to Invest in a 401k

While there is certainly no wrong way to invest in a 401k (any saving you do is to be encouraged!) there are some mistakes that are good to avoid.

Not contributing up to your employers match is the first mistake. While you may be focusing your investment dollars in another type of account, like an IRA, you still want to take advantage of that contribution match. Just as your retirement account itself is a benefit from your employment, so is this match. This is money you won’t be seeing anywhere else and if you don’t take advantage of it you’ll be throwing money away. It may not seem like a lot of money but in the long run this money really adds up, especially because this money is invested and will earn you returns each year until you retire and start making withdrawals. In your retirement account, like no where else, a little bit of money really adds up, so don’t miss out!

On the opposite side, investing every spare penny you have and then cashing out or taking a loan when an emergency comes up and you’re short on cash is a huge mistake. Financial emergencies will certainly come up, life is full of unexpected expenses. You need to have a small emergency fund built up specifically for this, and then slowly over time you should build up a six month fund that you could live on if you suddenly became unemployed and had a hard time finding a job or something else came up where you were unable to work for a while. The small emergency fund (think, $1,500) should be a top priority, and then after that you can slowly save this six month fund while also saving for retirement. Having this cash on hand will keep you from being tempted to access your retirement savings early.

There is no wrong way to invest in a 401k, investing is something many people put off for far too long, so make sure you’re saving and you’ll be ahead of the game.

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