Leaving college and getting your first job is a huge life change that can be stressful. Then when you add in thinking about your future, more specifically your financial future, it can feel extremely overwhelming.
Thinking about the prospect of investing in 401(k)s shouldn’t be scary.
Trust us, you aren’t the only one who doesn’t know what a well-balanced portfolio looks like (or why it even matters right out of college). A lot of recent grads and young professionals feel the same way you might, but they shouldn’t.
It’s like a TV show “everyone” watches; most people don’t watch Game of Thrones, but we assume they do because it feels like it’s everywhere. In the same way, most people aren’t that knowledgeable about investing, even though we might think they are because information about investing is everywhere, from commercials to social media.
You shouldn’t let that idea get in the way of taking some basic, proactive steps that could help enhance your 401(k). Here are some essentials to know about that all-important savings vehicle:
#1 Consider your Circumstances Before Contributing the Max
A lot of 401(k) advice revolves around getting people to try to contribute the maximum allowed each year. And that can make sense for a lot of people, particularly if contributing the max isn’t a huge financial stretch. But if you’re spending every last dime trying to reach that maximum contribution number, it may not be the best use of your money.
First, you may want to think about whether you’re going to need any of those funds prior to retirement-ish age (currently 59½). Withdrawing money early from a 401k can result in a hefty penalty.
There are some exceptions—for example, first-time home purchases may be exempt from the early distribution penalty. But for the most part, if you know you need to save for some big pre-retirement expenses, it may be better to do so in a non-qualified account .
Another consideration is whether you should be putting all of your eggs in your 401(k) basket. Of course, these accounts can offer big benefits in terms of tax deferral, and may come with a matching contribution from your employer as well. But if you’re eligible for a Roth IRA, you may want to consider splitting your contributions between the two.
While 401(k) contributions are not taxed the way in but are taxed on the way out, Roth IRA contributions are the opposite—taxed on the way in but not on the way out. If you’re concerned about taxes going up or being in a higher tax bracket at retirement, then a Roth IRA can make sense as a complement to your 401(k). The caveat is that these accounts are only available to people below a certain income level .
#2 Don’t Let Yourself be Swayed by “Hot Tips”
If you are not used to investing, it is tempting to panic over small losses. This is also known as “the day-trader mentality,” and it is one of the worst things you can do — especially with a 401(k). Remember, investing is for the long haul.
Getting spooked by a dip (or even a crash like the one in 2008) and pulling your money out of the market has proven to be a poor strategy time after time. Bottom line? Don’t get caught up in the day-to-day—just try to keep focused on the bigger, long-term picture.
#3 Using Student Loan Refinancing or Other Avenues to Get Liquid—Not Your 401(k)
A 401(k) can contain a lot of money, that can seem to just sit there. It can be amazingly tempting to raid it, especially when you think that you have decades left before it’s needed. But the surprising fact is, if you add up the early withdrawal penalties, missed returns and compound interest, and other factors, even a slight withdrawal could cost you .
If you need a car or a house, or want to pay off debt, there are other options.
If you have student loans, one potential avenue for freeing up cash is to try to refinance your student loans at a lower interest rate through a lender like SoFi. Refinancing your student loans may give you the freedom to make purchases, or even just live above water, without hamstringing your future.
As always, you should be discussing 401(k) and investment strategies with a qualified financial advisor and researching options independently, too. Never forget that it is your money and you have a hand in its future.
SoFi can’t guarantee future financial performance.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.