When investing in your employee 401K plan, you are putting money away into savings each month without having to think about it. Because the deduction is automatic, saving becomes a part of life. You do not need to plan on it or crunch numbers. You will become accustomed to the 401K contribution, making saving easy and painless.
Another benefit of investing in a 401K is the ability to take advantage of dollar-cost averaging. What is dollar-cost averaging? With a 401K, the fund is able to make a purchase of a particular investment at a fixed dollar amount, and on a schedule: For example $100 worth of a particular stock each month for 3 months. If the price fluctuates, you are able to take advantage of the price change. You are not locked in to the higher price per share if the stock price goes down.
Many people chose to invest in a 401K for the tax benefits. Because your 401K contribution is deducted from your paycheck before taxes, your total taxable income is lowered. In fact, you could even benefit by saving the taxes you would normally be paying. Your income minus the 401K deduction may even offset the tax amount, meaning that your paycheck is about the same as it would be if you were being taxed on the full amount, rather than contributing a portion to your 401K. In the end, you are saving while you barely notice the deduction in your paycheck.
If you are lucky, your employer may even match a portion or all of your 401K contribution. When employers offer incentives such as this, it’s well worth it to take advantage. Your retirement savings will double. If you are concerned about losing your 401K if you switch jobs, don’t be. You can take your savings with you. It’s your money after all.
Comments are closed.