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A Question For the Readers on Investing

I thought I’d try something a little different today. Instead of me writing up a lengthy post, I thought I’d offer up a question that I’ve been deliberating on.

“Should I invest a large portion of my extra income in my 401(k) or should I only put in a minimum amount and save the rest for a business venture?”

Some necessary information:

  • The company I work for offers 50¢ on every dollar that I put into my 401(k) (up to 4% of my net income) – I won’t be quite up to the 401(k) Contribution Limits though.
  • I am currently building some passive income through this website and intend to keep it up for many years
  • My wife would like to open her own business, which would involve some up-front capital (we would love to start it with cash)
  • I’m concerned about adding to my 401(k) because I plan to retire early. With a 401(k), I won’t be able to withdraw the money without penalty until late in life
  • I suppose a Roth IRA is an option as well (though I’ll be nowhere near the IRA contribution limits)

So what do you think? I would love to hear your solution! The best response will receive 10 additional entry points in my $25 Amazon Gift Card giveaway. I will make my decision by the end of day Saturday, January 15, 2011.

Investing Money

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

19 Comments

  1. I would split the different. Put 50% in the 401k and 50% for the business venture.

  2. I think you should invest in your 401(k) until you meet your match limit (4%). Then you should max out a Roth IRA. If you have met those two, you should look at your investment options: stock market, savings, or your wife’s business. Each carries their own risks/rewards. You could always split among them, and diversify!

    • Should I really invest in something so heavily that I can’t take out until after I’m 60? That really just makes me nervous.

  3. Max out your 401K upto what your employer matches, use the rest for your business venture.

  4. Invest up to the company match in the 401(k) to take advantage of the bonus money.

    After that you can max out a Roth IRA. With a Roth you have the option of taking out your contributions without penalty.

    If you know you will need money for your wife’s start-up, then put the money somewhere safe like a high yield savings/checking account.

  5. This is an age-old question – risk versus security. From a purely logical point of view, Robert, Craig and Moneycone are right. If you can get free money from your employer, you should take it. That said, 401K’s are no guarantee of a secure retirement. Investing in yourself (or in this case, your wife) may be a more secure move. Not to mention, she (and maybe you too) will be following your dream so that’s priceless.

    Sometimes you have to follow your heart. You only get the one life after all and while living well in retirement is great – living well now is pretty good too.

  6. Agree with Craig. 4% to 401k to get the match then max-out Roth IRA. As he said you can take out your contributions from the Roth IRA at any time without penalty. Best of both worlds really.

  7. Yeap, invest in 401k to get all the company contribution, then max out Roth IRA, then save the rest for start up.
    For the start up, I suggest getting a loan from the bank.

    When you retire early, don’t touch your 401k. Just manage it and let it grow. You will need the 401k when you are 70 a lot more than 50. You should figure out a way to have just enough income to pay the bill, maybe by then the business will do that.

  8. I think no matter what add’l thing you do ~~ that .50 per 1.00 matchup up to the max of your 401K has got to be your first choice. After that you can save all the rest for the startup. I don’t know how much “extra” you are talking about after the 4% Net to 401K or how many $$ in startup you have estimated, or if you wife plans to work and do the startup or quit and just focus on that… so for me it’s hard to advise after that.

    We paid off everything, including our mortgage before we used our #3 house to help finance house #4 and our business. We then made paying that mortgage off a priority. The $$ we took to start the business and live for 3 full years with no income if necessary was about 50% of the value of house #4. And once we got the business moving, we paid off house #4 in 3 years. Hard to believe that was about 20+ years ago now. We still work the same business today, by the way!

    • Each time you comment, I am still impressed with what you have accomplished in life! It gets me excited about heading into the future of investing and business building! 🙂

  9. You could always invest it in the 401(k) and then if you do get to retire early (hoping you do) you could always borrow against the 401(k) without drawing it to further other business interests, if need be.

  10. Contribute upto the employer match for sure, that is free money. After that I would split 50%/50% FOR roth IRA and business cash savings. You can use the business cash first and after that if you need to you can take the roth contribution. If your business does well and you don’t need more money, the ROTH will stay and earn more money for retirement. Just an idea…

  11. As far as priorities go, I would definitely make sure that 1) you fund your 401k to the employer match. Then, 2) make sure you have a proper emergency fund set up with 3-6 months of cash expenses. From there, you can then contribute money to your 3) Roth IRA and 4) business ventures.

    That’s what I would do!

  12. Save that 401K – then save at least $10,000 for emergencies……then get Dar’s savings for her business, and in the mean time, do some research as how much $ you will need for your wife’s business….then save for that….and talk to a CPA for how to set up the business the best way!

  13. Interesting… I would do what the majority said: invest into 401K to get all you can as far as company’s match goes, then Roth, then… put some in savings and then some into business.

  14. Never pass up your employer match. It is hard to get 50 cents profit on the dollar like that!

  15. Looks like everyone would advise that I put in at least 4% into the 401(k)! 🙂

    After reviewing all of the responses, I decided that I liked Suba’s idea the best.

    “Contribute upto the employer match for sure, that is free money. After that I would split 50%/50% FOR roth IRA and business cash savings. You can use the business cash first and after that if you need to you can take the roth contribution. If your business does well and you don’t need more money, the ROTH will stay and earn more money for retirement.”

    If the business takes off, we won’t need the money and we won’t be overly leveraged in the market. But, in the event that the business doesn’t work out, we’ll still have the proper back-up for retirement. 10 entries for Suba.

    • oh if only our lives play out the way we plan! I too would be a millionaire!


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