Posted by: endithinks | September 4, 2007

On Investments

Growing up in a household that lived paycheck to paycheck, I did not learn too much about the world of investments, retirement, 401 K’s and mutual funds until I started taking an interest in my late college years.

I read a book about investments called Smart Couples Finish Rich by David Bach and it was an eye opening read.

I have now done quite a few of the steps the book mentioned and am still working on catching up with a few other things (creditors I’m almost ready!) and I just wanted to write something about the importance of investing in retirement and your future early.

The standard employment sponsored retirement plan is the 401 K which is basically a mutual fund that the employer for the most part matches in your pre tax investment. This notion of pretax is extremely important to grasp as the investment comes out of your gross pay before the government gets a portion of it.  This in essence lowers your taxes and you gain retirement benifits. 

Annual Income 25,000

Gross Monthly income 2,083

Monthly contributions 6 percent 125 dollars

Income tax (without 401 k contributions) 583

Income tax with 401k contributions 548

Social Security with and without 401 k 159

Take home pay (without 401K) 1341

Take home pay with 401 k 1251

That was an example taken from an employee handbook about the employer sponsore 401k at a generic company.  The numbers don’t lie.  For the contribution into a retirement plan, you pay less then you get (take home pay is reduced by 90 dollars for the benifit of 125).

This should not be your only form of retirement planning, but I highly encourage you to get involved in your employers 401 K plan at the very least and contribute more than the starting rate, usually 3 percent.  The returns are worth the investment.

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