Too many young people are missing out on a shockingly simple way to get free money
Free money could be right at your fingertips, and it doesn't require luck, skill, or even much time.
Most companies offer 401(k) plans - a type of retirement account that gives you large tax advantages and allows you to compound more money over time - and in many cases, employers will also offer a 401(k) match.
"The company match is literally free money," Ramit Sethi writes in his personal finance book, "I Will Teach You To Be Rich."
However, of employees age 25 and under, less than one-third participate in a 401(k) and only 16% take full advantage of the 401(k) match. "So 84% of young employees are losing thousands of dollars per year because they haven't spent a few hours to learn how this stuff works," Sethi explains, citing data collected by Hewitt & Associates.
While Bank of America Merrill Lynch found that millennial participation in 401(k) plans is increasing significantly, many young people are still not investing as much as they could be.
The company match is a simple concept: your company will match whatever contribution you put towards your 401(k) up to a certain amount.
For example, say your company offers a "one-to-one" match up to 5%. If your salary is $100,000 a year and you choose to contribute 5% of that ($5,000) to your 401(k), your company will also put in $5,000, making your actual investment $10,000 each year.
In this example, "If you start at age 25 and earn 8% on your money, you'll have more than $2,700,000 with the 401(k) match when you retire - or just over $1,350,000 with no match," explains Sethi. " And each year you invest, the difference grows larger."
It takes four simple steps to start accumulating your "free money:"
1. Call your HR administrator and request the necessary paperwork to open a 401(k) account.
2. If you have an employer match, calculate how much you need to contribute to get the full match. If you can afford to have that amount taken out of your paycheck and still live comfortably, do it. "If not, adjust the amount down until you're comfortable," writes Sethi. "Remember, investing 85% of the way is better than not doing it at all."
3. Set up your account so that the contributing money is sent directly to your 401(k) account, meaning you'll never even see it in your paycheck. This is a powerful use of psychology to trick yourself into investing, Sethi notes: "If you don't see the money in your paycheck because it's automatically sent to your 401(k), you'll learn to live without it."
4. Let your money accumulate and grow over time.
If your company does not offer a match, open up the 401(k) anyway, but don't contribute any money towards it right away. While it is important to eventually be contributing to a 401(k) and a Roth IRA, Sethi says to prioritize the Roth IRA over the 401(k) if your company does not offer a match, as it will be a better long-term investing deal than a non-match 401(k).