First Time Participating In 401k (funds, pay, taxes, debts)

[nanogirl21]

I’m 28 years old and recently accepted a position that will increase my current income of $45,000 to $65,000 per year. This will be my first time participating in 401k, IRA, and other retirement opportunities. I’m not really sure what all this means and am more confused that ever. I do know that my company matches the 401K contribution up to 4% of my income. Should I only invest 4% into my 401k? What about IRA? Any tips/suggestions is greatly appreciated.

Also, I have over $50,000 in debt and a very poor credit score (570 TransUnion on Credit Karma). I got into this mess from school loans and dumb credit card mistakes that I made when I was younger. I’m working hard to turn around my financal situation and raise my scroes, but It’s been extreemly difficult on $45,000/year and being the only income provider in my household. When creating a budget/plan for my new income what percentage of my monthly take home income should I try to apply towards debt and everything else? Again, any information is helpful.

Thank you.

[Southern man]

Always pay yourself first. Always take advantage of at least the 401k match.

[Aredhel]

What i would do for now is to put at least 4% into the company's 401k (because not doing so is basically leaving part of your salary on the table) and concentrate on building up a decent-sized emergency fund (at least 3 months' living expenses) and paying down that debt. Once the debt is gone, then it's time to decide whether it's better to put more into the 401k or instead to open either an IRA or Roth IRA. That choice will depend on how high the 401k fees are and what options it offers as investments.

[jiminnm]

I agree with the above comments to contribute enough to get the company match. Review the alternatives for your 401k investments and pick a solid index or retirement date fund to start and then learn more about investing. I would use the higher income differential to pay down the debt, which will also improve your credit score, before making other investments. It will be a difficult next 2-3 years, but when that debt is gone you will be happier and should be less likely to incur that type of debt again.


For repayment, be sure you stay current with all bills. I always recommend that people make extra payments toward debt in order of interest rate (highest to lowest) because that saves the most money in the long term. Others recommend paying debt off in order of size of debt, because that results in smaller debt amounts being paid off first and gives a psychological boost to continue. You have to decide which method works best for you.

[rjm1cc]

You mention lack of knowledge. For now invest in a stock index fund. Then start learning about financial planning. If you go to the large online mutual funds and stockbrokers and work with their retirement calculators you will start to learn about financial planning. Do a little reading on SWR (safe withdraw rates).

To pick a saving percent I would go with 15% but if you can not afford that with your other needs at least do the 401k 4% and I would consider a ROTH IRA of a few more dollars. Get it started. You will probably benefit from a tax cut and I would try and save that.

If you had no financial problems I would say max out your 401k and ROTH IRA for the year. Also start building up an emergency fund.

[MrRational]

Originally Posted by nanogirl21

...recently accepted a position that will increase my current income of $45,000 to $65,000 per year.

Congratulations. The first decision is what % of that $65,000 you intend to save/invest.

...what percentage of my monthly take home income should I... apply towards ....?

First... allocate off the Gross Pre Tax Amount and make those 'moves' before you even see a check.
I'll suggest 15%.

Calculate your M2M household budget off the AFTER tax net. Pay yourself first.
Then work to deeply limit your housing costs (rent, utilities, etc) to what just ONE weekly net check will cover.

This will be my first time participating in 401k, IRA, and other retirement opportunities.
I do know that my company matches the 401K contribution up to 4% of my income.
Should I only invest 4% into my 401k?

Unless the Company plan does a really stupendous job of managing the money (few will)
then up to the matching 4% limit is a reasonable starting point. It's free money.

What about IRA?

PreTax IRA account for most of the rest of your total % to save/invest.
After you've filled up an emergency fund savings account.

Also, I have over $50,000 in debt...

Once you solve this then you can start saving AFTER Tax income.
For now... pay off your debts. Or talk to a lawyer about bankruptcy.
I'd much rather see you do some sort of 2nd job to pay off the debt soon.

[Moonwalkr]

1) 401K to match, sock a little away monthly for a cushioning emergency fund

2) Negotiate/Consolidate 50k debt into lower interest if possible
3) Cut expenses even further and work on getting rid of that debt.

4) Once debt free, look into Roth, HSA, and maxing 401K


I'm glad you are learning from past debt mistakes and moving forward.

[ServoMiff]

Originally Posted by nanogirl21

I’m 28 years old and recently accepted a position that will increase my current income of $45,000 to $65,000 per year. This will be my first time participating in 401k, IRA, and other retirement opportunities. I’m not really sure what all this means and am more confused that ever. I do know that my company matches the 401K contribution up to 4% of my income. Should I only invest 4% into my 401k? What about IRA? Any tips/suggestions is greatly appreciated.

Also, I have over $50,000 in debt and a very poor credit score (570 TransUnion on Credit Karma). I got into this mess from school loans and dumb credit card mistakes that I made when I was younger. I’m working hard to turn around my financal situation and raise my scroes, but It’s been extreemly difficult on $45,000/year and being the only income provider in my household. When creating a budget/plan for my new income what percentage of my monthly take home income should I try to apply towards debt and everything else? Again, any information is helpful.

Thank you.

You've done a great thing by asking questions/seeking help, so kudos for that. The first step is recognizing that you had a problem and are now working to fix that.

I have a few other questions that I haven't seen other posters ask yet:

1) Why are you the only income provider and how many people are you providing for? Having children can be just as much of a mistake as credit card debt from a financial perspective if you're not taking steps to prevent a pregnancy. I don't at all mean to diminish the existence of any children you might have, but do look into taking steps to prevent any further ones to save yourself further emotional and physical stress. If you're taking care of elderly family members, I really empathize with you because that's a tough burden to carry.

2) Have you created a budget to reduce expenses? This is a big one. It's not much different than losing weight - you have to dedicate to tracking how much you spend and for what in order to really understand why all the money you work hard for is disappearing. Mint.com or YNAB.com work well for this digitally, or you can use the old school envelope method with cash for each budget item. I find in today's digital payments world it's easier to use a mint.com type of resource over cash since so many bills are paid online these days.

As others have indicated - the best way to pay yourself (e.g. save and invest money) is to do it automatically from your paycheck and budget off of what you get as your net paycheck. Out of sight, out of mind. You won't miss money you never really saw in the first place. DON'T upgrade your lifestyle just because you got some extra income now.

At a bare minimum until your debt is resolved, follow what others have said - invest at the 4% to get the max match and then create a savings account at Discover Bank, Ally Bank, or some of the other online savings accounts that pay a high rate of interest (these days, something from 1.5%-2% is good) and put $100-ish (based on $65k/year - $200/mo is around 10% of your take home) in that account per pay period , and put all of your tax return funds in there and other bonuses until you get to a minimum of 3 months worth of all of your "I have to have these things in order to provide" items, like shelter, utilities, food, etc. If you wanted to be even more strict, you could just say 3 months of all expenses for your emergency fund.

In the meantime, try to negotiate your debt. If you have a car loan and you have some equity in it, perhaps sell that car and buy something reliable but older and cheaper. Half of your credit score is based on payment history. Paying everything on time and creating a solid history is what will get you out of the hole and improve your score the most.

Once the debt is paid off, then come back for further advice on how to invest your newfound excess of money.

[dspguy]

My advice:

1. Like others said - at a bare minimum, do the company match
2. Get yourself enrolled in the 401k plan and get those deductions started ASAP. The "sting" of contributing to your 401k hurts a lot less if the deductions start up before you get used to your new shiny paycheck that does not have those deductions.
3. If you can, get yourself to put away at least 10% now. See #2 about how the sting will lessen if you do it early. However, don't hamstring yourself either. 401k savings don't help you save for a down payment on a house. If you did decide that you needed to pillage your 401k for something like that, you are paying 10% penalty on the withdrawal and that withdrawal is counted as income for the year and taxed as such.

So while getting to at least 10% is good, but whether you can do it or not is a tough call that only you can make.

[nanogirl21]

Thank you all for the advice. To answer one of the questioned mentioned: I am the only income provider due to the death of my father and an elderly mother who is unable to work. I don't have any children, but do have two small dogs that I think are sometimes worse than children.

I took some time to jot down my monthly expenses. I do have a car loan that has about 8 payments left. I've been paying more than the miniumn due inorder to pay off the loan a few months early. The 17% is high, but I expect it to drop to around 9% in Janaury.

Taxes + 401K 30%
Transportation & Auto Insurance 17%
Debt Repayments 10%
Food & Groceries 9%
Entertainment (Phone,Cable,Internet,Gym) 9%
Savings 9%
Rent/Utilities 8%
Pets 3%
Personal Care 3%
Health Insurance 3%