Your 401(k) can be one of the most powerful tools available to you when it comes to planning for retirement. Between automatic contributions directly from your paycheck, tax advantages associated with those types of plans, and the possibility of an employer match, a 401(k) can help you build a strong nest egg.
Yet the reality is that we all have limited incomes and multiple priorities pulling at our available finances. Still, there is a bare minimum amount you should be contributing to your 401(k): enough to get every penny available from your employer's match.
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Why that match matters so much
Maxing out your employer's match is such an important goal that it is hands down the first investment you should make. That match acts much like an automatic, and usually quite substantial, return on your investment that's only available to you if you first sock your money away in the plan.
While matches vary by employer, a typical match is 50% of what you contribute, up to 6% of your salary. In that situation, by socking away that 6%, you'd really end up with 9% of your salary inside your 401(k). Stock market returns are never guaranteed, but that type of match can easily represent the equivalent of four to five years' worth of returns on the money you invest.
We mere mortals simply do not have any other sort of investment available to us that offers that type of return with that much certainty behind it.
How to get there, or even beyond it
Of course, if money is tight, it can be difficult to come up with any of your salary -- much less 6% of it -- to sock away. If you're in that situation, you can work up to it over time. You basically have two levers to work with: Earn more money and/or lower your costs.
From an earnings perspective, if you're paid hourly and can get more hours (potentially even at overtime rates), that may be the easiest way to earn a bit more. Otherwise, there's nothing wrong with moonlighting to pick up some cash from another job. If you've got stuff you can sell to raise cash, that might help too -- but that tends to work better as a one-time boost to pay off debts than an ongoing income stream.
When it comes to your costs, there are two types of costs to consider: your ongoing costs (like a cell phone bill) and your debt servicing costs (like a mortgage, car loan, or school loans). One decent strategy to follow is to first look at your ongoing costs to get them down as low as feasible, and then quickly pivot to your debts.
From an ongoing costs perspective, start by tracking where your money is going each month -- every dime of it. You just might find that you have some expenses that you didn't realize you were paying (like unused, subscriptions that automatically renew to your credit card) or other that you can easily live without. That money can be easy to free up by cancelling the subscription and/or making the decision to not spend.
Beyond that, you might also find that you have expenses that you're paying that with a little creativity, you can lower, even if you don't want to or can't eliminate them entirely. Can you home-brew coffee or take advantage of a free coffee machine at work, instead of ordering it from at a coffee shop? Can you buy last year's fashions at an outlet store instead of being dressed in the latest styles? Can a bus get you to and from work cheaper than driving?
As you free up money from those expenses, you can use that freed up cash to more aggressively pay off your debts. The most efficient approach to do that is the debt avalanche method.
With that approach, you start by lining up you debts in order from the highest interest rate to the lowest interest rate. On all but the highest interest rate debt, you pay the minimum. On the highest interest rate debt, you pay as much as you can, above and beyond that minimum, until it's paid off. You then take the money you had been paying toward that debt and add it to what you had been paying on your new highest interest rate debt. You repeat, until your debts are either gone or at least under control.
Get started now
If you can save enough in your 401(k) to get the most of your employer's match, now is the perfect time to sign up to get it in place. If you can't yet get there, now is the perfect time to take a look at both your income and expenses and build a plan to get them to a point where you can.
The sooner you get started, the longer you'll be able to capture the money your boss is offering you in the form of that 401(k) match. That can make a huge difference in your ability to build a decent nest egg by the time you retire.
