There is the potential that 401Ks can be positive for employees and employers both, but this study is saying: Wait a minute!
I recently saw a fascinating study that concluded that having a 401K leads to higher debt. The main reason for this is the move towards automatic 401K enrollment by employers. It used to be that if you joined a new company, you had to sign up if you wanted to contribute to a 401K. If you have to take action to do something, the chances of you doing it are less than if it is automatic. Companies moved to automatic enrollment because they could get having savings levels from those employees. There is the potential that 401Ks can be positive for employees and employers both, but this study is saying: Wait a minute!
These employees automatically enrolled are carrying more debt than those who are not enrolled. It’s not credit card debit, which is good, but is mostly car loans and mortgages. My experience with this is that this is because people give as much as they can to their 401K as soon as they’re able. Why is this bad? Because these people are not building a foundational savings amount before putting money into their 401K.
You should not contribute to your 401K until you’ve built a foundation.
You should not contribute to your 401K until you’ve built a foundation. When you put money into a 401K, that money is tied up in inaccessible without large penalties. Instead of building up a savings account, you have money in an account that you can’t access for decades.
How, though, does that contribute to debt? If you don’t have liquid savings in your account even if you contribute as much as you can into your 401K, what money can you use when you want to make a large purchase or have an emergency? You’ll need to take out a loan. This is okay short-term but it will cripple your long-term growth.
Ask yourself how much money you have in your savings account. Is it enough for your live comfortably on for 3 months?
I have a challenge for you this year...
Figure out how much you want to put into your 401K and create a plan to do that. Then instead of starting that plan, pause. Now, ask yourself how much money you have in your savings account. Is it enough for your live comfortably on for 3 months? If the answer is no, consider stopping contributions to your 401K and get your savings account up to that level. It’s worth missing up to a year of your 401K benefits to have this emergency fund available. You’ll have more peace of mind and a better foundation going forward. You can act aggressively because you have liquid savings available on the side.
Some reading this will say: that’s great advice for my kids or grandkids, but this also applies to you! You’re right, the advice given to young people today is to get a job and start investing in your 401K as soon as possible. Again, this advice can apply to anyone who is reading.
If you have a large amount of debt but you’re still contributing to your 401K, my challenge above is great for you. Spend this year tackling your debt, building your foundation and then contribute as much as you can in the future. Without your founding, your debt will only increase.
We can help you figure out how to get you out of your stressful debt.
If you don’t know how to manage your debt and it’s overwhelming, please know you can get out of it. We are a great resource for you. You can set up a free consultation today and we can help you figure out how to get you out of your stressful debt.
It’s not rocket science but it does require a plan, which we can help you put together.