Let's get real. As awesome as it would be to max out every possible type of investing account, we mere mortals only have so much cash to go around. Making priority calls on how and where to invest even part of your income just might be one of the toughest parts of managing your money these days.
With that in mind, there is one type of investment you should prioritize making over virtually all other options. In addition, there's a bare minimum amount that you should probably strive to contribute to that account before looking to invest elsewhere.
That account? Your 401(k). The amount? Enough to maximize your employer match. Here's why this is the bare minimum you should be contributing to your 401(k).
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It's probably the strongest "guaranteed" return you can get
First and foremost, your 401(k) match is quite likely the strongest "guaranteed" return you can get. Companies that offer matches have fairly wide discretion in what those matches look like. Still, by definition, to get a match, you first have to make your own contribution.
It's that need to make your own contribution that makes the match such a high return on investment. Say your employer offers a fairly typical $0.50 match on every dollar you contribute, up to 6% of your salary. If your salary is $50,000 per year, then your boss will hand you as much as $1,500 inside your 401(k), but only if you first sock away $3,000 in that account on your own.
Contribute less than that, and you'd get less from your match. On the flip side, if you contribute more than what you'd need to reach your maximum match, you're still building your retirement nest egg faster, but that boost from your boss runs out.
Either way, the equivalent of an instant 50% return on at least part of your investment is exceptionally hard to beat.
It's one of the easiest ways to invest
In addition to the lift from your boss's support, your 401(k) is also one of the easiest ways to invest. Once you sign up, money gets automatically invested, directly from your paycheck, every time you get paid. That keeps up every payday, unless you hit your contribution maximum for the year.
For people under age 50, the typical maximum is $23,000 for 2024. For those age 50 or up, that maximum increases to $30,500. If you're able to sock that much away every year, congratulations. If not, then recognize that every bit you're able to invest helps.
Over time, as your salary increases and/or you pay off debts, consider increasing your contribution until you get closer to that overall max. While it's not quite as valuable as getting every penny of your match, the automatic nature of the investments inside your 401(k) still makes it an attractive way to save for your future.
What if you can't max out your match, yet?
Striving to max out your 401(k) match is such a no-brainer that it's frequently considered the hands-down first investment you should make. Still, especially if you're just starting out or are struggling with debt loads, even socking away that much might be a tough hill to climb.
It's OK if you can't quite get there yet. Just recognize that it's such a valuable tool that you'll want to take advantage of it as quickly as possible. Between now and then, it's a question of figuring out ways to get your costs down and/or your income up.
From a cost-reduction perspective, retiring debt can be a great way to reduce your monthly outflow. The debt avalanche method is the most efficient way to get those debts paid off.
To use it, line up your debts in order from highest interest rate to lowest interest rate. On every debt but the highest, pay the minimums. On the highest-interest-rate debt, put every penny you can, above and beyond the minimums, toward paying off that debt, until it's paid off. Once it's done, add every penny you had been paying toward it to what is now your new highest-interest-rate debt. Keep it up at least until you get some real breathing room in your monthly cash flow.
When it comes to earning more income, figuring out if there are ways to get more hours or overtime at your current job might be the most straightforward path. If that's not feasible, consider picking up a side gig or seeing if there are other places willing to value your services more.
If you have stuff you don't need anymore, you can also sell it to raise a one-time infusion of cash. That can help you with debt reduction, but it doesn't do much when it comes to finding recurring streams of money to invest.
Get started now
No matter where you are on your investing journey, the sooner you get started, the more of those all-important 401(k) matching contributions you can receive. So make today the day you get your plan in place to start making the most of your boss's generosity. That way, you'll give yourself your best chance of getting every penny you can to help you invest for your future.
