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Best investment decision we’re made (and the worst)

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The idea of ​​investing can be intimidating. Especially if you are young, have little savings and know nothing about the subject.

My husband Alan and I started investing before we knew what we were doing. And before we were on solid financial ground.

At first it was a little uncomfortable, but we were motivated by “free” money and convenience.

The good news is that it was one of the most important financial decisions we ever made.

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Our Best Investment

We started contributing to Alan’s employer’s 401 (k) plan in our mid-20s. Since then, we have also invested in other ways.

Still, for us, the 401 (k) is the best investment decision, because it’s the one that did we start.

However, it was not easy to start investing.

We were young, knew little about investing and spent every dollar out of every paycheck. So at the time, it felt like we were taking a significant risk.

But, despite our fears, and thanks to some wise advice from Alan’s college professor, we got started. And we’ve been investing in the 401 (k) for over 20 years now.

We even invested during the 2008 stock market downturn.

We did not touch the investments and continue to contribute. And we were grateful when we later saw our investments bounce back and grow.

Of course, history is not an indication of future events. But that experience has taught us not to make hasty decisions during market volatility.

Since then, experience and education have taught us more about investing.

So, we opened other retirement accounts, like Traditional and Roth IRAs. And later, we added a brokerage account and crowdfunding to our investments.

As a result, we have continued to improve our finances over the past 20+ years.

Related: IRA at 401 (k): How They Difference and Where to Invest 1st

Why the 401 (k) is best for us

1. It involved “free” money.

Initially, I was reluctant to invest in the 401 (k) as it would reduce home payments. But it was the employer contest that convinced me it was worth a try.

Free money is hard to pass up, and Alan’s employer matched up to 6% of our 401 (k) contributions.

Plus, once we started making contributions, we got used to a little less in salary, and that was not a big deal.

2. It made us invest relatively early.

Alan had a university professor tell his class – every time they met – to invest early and regularly. He repeated the advice over and over, and it cost.

Alan was determined to start investing, even though it was difficult to give up a portion of the salary.

We did not think about asset allocation, risk tolerance, diversification, expense ratios or even our goals. In other words, other than saving for the future, we did not know what we were doing.

But investing in the 401 (k) was convenient. Also, the employer contributions and limited investment choices made it less overwhelming.

3. It was automatic.

Our 401k contributions were automatically taken from each salary check. Since we did not even see the money, we do not have to do it decision to contribute every month – it just happened.

Moreover, it was not convenient at the time to change the contribution. So we kept investing every month.

4. It was easy to contribute more with increases.

We have contributed the minimum to get the employer 401 (k) match for many years. But later we started increasing the percentage of contributions with each annual increase.

We did this for a few years, and since we never experienced the increased payment of the increase, we did not miss the money.

Ultimately, increasing our contributions meant that the IRS 401 (k) annual limit was reached. By using annual increases, it was more feasible for us.

5. The tax benefits.

401 (k) employee contributions are before tax, which reduces gross income. So, it has helped to lower our tax bill every year.

Also, as the 401 (k) grows tax-free, it is a win-win for tax benefits. (Yet we have to pay income tax on everyone withdrawals later.)

Read: What can I do with an old 401 (k)?

The disadvantage of the 401 (k)

The main disadvantage of the 401 (k) is that there is limited access to it before age 59½ without paying a 10% fine (plus income tax).

Yet there are some ways to withdraw it before then without paying the fine.

For example, in specific living conditions, the IRS allows early payments. Disability and unpaid medical bill expenses are a few cases that qualify (see IRS website for more).

A 401 (k) loan is also possible, but each employer has different 401 (k) loan rules. You need to repay the loan with after-tax dollars plus interest, and repayments go to your 401 (k) account.

In addition to these options, there are other ways to access 401 (k) funds without penalty.

If you are planning to retire before age 59, you may want to explore the following options:

  • The Rule of 55 stipulates that at the age of 55 you can withdraw from your current employer’s 401 (k) without penalty.
  • IRS Rule 72

    Before using any extraction method, it is wise to fully understand it. Or hire a financial advisor and tax advisor to avoid unnecessary fines.

    Alan and I will have access to the 401 (k) funds before age 59½. At this stage, we plan to take a different approach by switching to a traditional IRA.

    We will then make conversions in our Roth IRA every year (and pay taxes on the conversions). Then, after five years, we will have access to the conversions, fines and tax free.

    For us, the 401 (k) restrictions are a minor inconvenience for all the benefits. It started investing in us and helped us invest consistently for years. And that put us ahead of the curve.

    Our weakest investment (s)

    I can not talk about our best investment without mentioning our worst!

    We bought two separate houses as our primary residence when we were young and newly married.

    At the time, we considered them an investment. And we believed that rent would throw our money away.

    But there is clarity afterwards.

    If I had to redo it, I would rent instead of buy, because we sold the houses within months. And it cost us thousands of dollars that we would have saved if we had rented longer.

    That experience taught me to think of a primary residence as a place to live, not an investment.

    Closing thoughts

    We did not know the 401 (k) would be such a good investment for us when we started. In fact, we did not think much of it at the time!

    We invested in the 401 (k) because 1) it was convenient, and 2) it involved free money.

    These two factors motivated us to start investing at a fairly young age. And after years of contributions, employee adjustment and compound interest, this is by far the best financial decision we have made!

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    Article written by Amanda

    Amanda is a team member of Women Who Money and the founder and blogger behind Why We Money. She enjoys writing about happiness, values, money and property.

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