Hope you all enjoyed the money management series thus far. Last week was the first of the series, Money Monday – Part 1 where we discussed the importance of creating and sticking to the budget. This week I want to talk about how you can get free money from your employer. Who doesn’t love free money?!?! If you’re fortunate enough to work for a company that offers a 401k match, equity, or any other financial initiatives then take advantage! Accounts and benefits to take advantage of;
Health Savings Account (HSA)
HSAs are basically like a personal savings accounts that can only be used for medical, dental, and similarly related expenses, but the key benefit here is tax savings. HSAs are the only account you can put money into, gain interest on, and use to pay for IRS-qualified health care expenses, all tax-free!
Another great perk, funds in your HSA stay with you no matter where you go in your career even when you retire. One of the major concerns of retirees are how they are going to afford and save for medical expenses. The great thing about HSA account is that the money rolls over from year-to-year, and after 65, the funds can be used for any purpose without penalty. Let’s do some math based on the below. If you contribute $3,600 a year for 10 years assuming $500 medical expense per year for the same duration, at 24% federal income tax, and 3% rate of return, you will have over $36,500 in your health savings account. Don’t forget about all the tax benefits too!
Some of you may be wondering what is a 401k? To keep it simple a 401k plan is an employer-sponsored defined-contribution pension account. 401k’s are the modern day replacement of a pension plan except the companies are the only ones winning in this end of the deal. Funding for a 401k comes primarily from the employee while pensions used to come directly from the employer….the small light in the tunnel is that 401k’s may be matched by the employer.
Depending on your company and contract the contribution amounts may vary. A common contribution amount is to match typically 50% of your total contributions up to 6%. Whatever the contribution amount, at the very least plan and budget to contribute whatever that minimum is so you can maximize your match. Overtime the difference between having a match and not having the match will make a significant difference. Just look at the graph below;
|This hypothetical example is for illustrative purposes only and does not represent any actual investment performance, price or yield. This illustration assumes a beginning balance of $0, assumes no increase in earnings and has an annual rate of return of 6%. Investment returns are not guaranteed, and your actual return may vary significantly from that shown.|
***For 2021 the top off at $19,500 with an additional $6,500 catch-up contribution allowed for those turning age 50 or older.
Covid – 401k
Is your employer planning to cut your contribution because of COVID? Thinking of what the best options are? I personally would recommend that you continue to contribute to your 401k but some other safe options include ROTH IRA, IRA, ROTH 401ks are also great options. Read up on the options and what makes sense with your specific financial situation.
Another benefit to take advantage of is the opportunity to purchase stock options. Every financial advisor will tell you the importance of keeping a diverse portfolio. Don’t go into debt to purchase stocks unless you can truly afford the risk and are very confident about the rewards. Ask yourself if this is money you can afford to lose.
Once you purchase stock options, you may want to hold onto a certain percentage of your shares while on the other hand, you may decide to sell some of them if the price goes up to a certain amount. When you own stocks within a company you can reinvest your dividends into an IRA account or similar to increase your retirement savings. The advantage is that company stock options are not typically protected from taxes in the same ways that a 401k, ROTH IRA, or IRA’s may be.
These are just some examples of company sponsored benefits that may be offered to you now or at one of your next employers that you can take advantage of.
Come back next Monday for Part 3 where we talk about starting your savings and investment plan. Remember, you need to carefully follow a budget, plan for retirement and invest wisely. It will take time, but it is possible. Start small finish BIG!