The Best Gift Millennials Can Give Themselves At Work This Holiday
Financial literacy and basic investing knowledge are invaluable
While I’ve referred to employee-sponsored retirement programs as boring, I was being completely satirical.
In reality, 401(k)s are anything but boring, especially if you’re in your 20s. So listen up, other young people. Of course there are dozens of factors at play when it comes to retirement fund performance like market behavior, inflation, fund choices, interest rates, expense ratios, loans, withdrawals… the list goes on and on.
But generally speaking, the earlier the better when it comes to saving for retirement.
A 25-year-old who makes $30,000 annually and saves the full company match - $1-for-$1 up to 6 percent - will have have $950,000 saved in their 401(k) by age 65, according to a Monster article.
Countless studies have shown that the earlier in life you start investing money for retirement, the more of it is likely to be there when it comes time to be old and move to Florida. A guy named Warren Buffett trumpets an investing strategy known as value investing, which is concerned with buying securities priced lower than their intrinsic worth and — get ready for it — owning them over a long period of time. He did okay for himself.
Do you have to make it your part-time job to invest with confidence? Absolutely not. That’s the beauty of passive investing — long-term appreciation with minimal maintenance. However, some knowledge is required before you start putting away money.
You wouldn’t buy a car without doing at least some research first, right? With that in mind, the best gift you can give yourself at work this holiday season is basic knowledge of investing terms.
Let’s get started.
Talk to experts
If your company offers a 401(k) or equivalent program, someone is acting as liaison between the company and plan administrator. Talk to your finance manager, who is most likely the liaison, and see what the plan comes with.
Sometimes through the plan you have the option to speak with a professional to discuss your financial goals a few times a year. If not, maybe your company’s finance manager, who also knows a thing or two about money, is willing to sit down with you.
But don’t stop your research after speaking to just one person. Ask people you’re close with what they think your best options are — maybe your parents who have been investing for a while can help inform.
Gaining multiple perspectives is key, especially when first starting out, so that you are exposed to a broad view of opinions and can make informed decisions.
Ask “stupid” questions
When it comes to financial literacy, stupid questions are like freebies. They don’t exist.
Curious what an expense ratio is? Ask! Unsure if you should be contributing to a Roth or a Traditional 401k? Ask away! Not confident you know how the company match works? Don’t be shy. Keep a list of questions to go over with the people you approach and make it happen. Some of those questions should include:
Which funds should I contribute to? What percent should I contribute to bonds versus stocks? Given my salary and age, should I contribute to a Roth plan, Traditional, or both? Should I “rebalance” my portfolio, and if so, how often? How much of each paycheck should I contribute?
Terms to Know
Here are a couple of basic terms you should know, courtesy of Investopedia.com:
- Company match (or matching contribution): “A type of contribution an employer chooses to make to his or her employee's employer-sponsored retirement plan. The contribution is based on elective deferral contributions made by the employee.”
Think of this as free money. If you can, always contribute enough money to your plan to receive your company’s full match. So, if they’ll match six percent of your salary, you should contribute at least six percent.
- Expense Ratio: “A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual calculation, where a fund's operating expenses are divided by the average dollar value of its assets under management. Operating expenses are taken out of a fund's assets and lower the return to a fund's investors.”
When you start contributing to a 401(k), you’ll need to select which funds to contribute to. This can seem daunting, especially with limited investing knowledge. It can seem like gambling, and in some ways, it is. With that said, an expense ratio is one number you should really pay attention to when selecting mutual funds (they’ll all have different expense ratios — .056, 1.45, 0.08, etc.) All other factors equal, the higher this number is, the worse your return on investment. Vanguard — if available in your package — offers many mutual funds with low expense ratios, some even under 0.10 percent (that’s really good). In general, stick to expense ratios under 1.0 percent, and you’ll keep more money in your portfolio instead of your fund manager’s.
Find sources you can trust
Hopefully talking to your finance manager or plan representative inspires you to do some research of your own. Sites like Investopedia, Morningstar and NASDAQ provide many free articles, beginner tools, and definitions to help you get started. They also act as a guide and suggest longer works that are worth reading, like the book The Intelligent Investor by Benjamin Graham.
The target dollar amount for your retirement nest egg hopefully is a big number but of even greater value is investing knowledge. For me, starting my 401(k) led to an interest in investing.
Financial literacy and basic investing knowledge, especially for young people with loans, are invaluable. Those are gifts that will keep on giving!
Monster Wants to Know: What are some tips you would share about saving for a 401(k) or other retirement plans? Share with us in the comment section.