How often have you been told to max out your 401(k) or 403(b)? Well I’m telling you to not even try. Sounds strange doesn’t it? That’s because we have all been told constantly that putting money into your 401(k) is a good idea. Certainly, if you have the option to either put money into your 401(k) or to buy a depreciating asset such as a new car, then I would certainly say you should invest in the 401(k). But, there are quite a few alternatives that I would consider a better option than that 401(k).
Get Your Match
Before you start cancelling your 401(k) investments, take note that I am not telling you to avoid 401(k) investing all together. If your company provides a match on your invested dollars, then I would invest up to that amount. For many, this match amount is 100% on the first 3% that you invest, which would equate to a total of 6% of your paycheck. There is nothing else out there that will immediately double your money instantly like a company match will.
Why Not Max Out the 401(k)?
So the big question you’re asking yourself is probably, “Why is it a bad thing to max out my 401(k)?” I have three answers to this question:
- Most people don’t have the means to put in the $17,500 to max out their 401(k) account each year. If they tried, they would most likely be
ignoring other items that would be costing them more money in the present – like a credit card balance with an interest rate of 17%. The net gain on their extra effort would be negative.
- Many rave at this 401(k) investment because of the tax benefits. True, you don’t get taxed on this money initially, but you will at some point – most likely when you need the money most, during retirement. And, based on the way our government is running things, I would say it’s quite likely that we’ll be paying a larger tax percent later in life.
- Investing in a 401(k) will handcuff you until the age of 59 1/2. If you decide that you want to invest your money into something else, you will be penalized up to 10% of the withdrawal. That just doesn’t seem right does it? It’s your money and you’re not allowed to do what you want with it!
Well if you shouldn’t invest all of your money in your 401(k), what should you invest in instead? Personally, I have invested my money into this website (the initial cost was $44, and don’t worry, I have earned back that money) and continue to benefit from its monthly earnings. More recently, I have been trying my hand at buying and selling cars. A few months ago, I purchased a car for $5,500, fixed it up a little and sold it for $7,000. It’s not for everybody, but it is fun to earn a thousand bucks in 3 months time. I have also invested in my house, which was a steal as a foreclosure. By putting a little elbow grease into it, I have increased its value by more than $40,000. And, within the next year or so, I will be investing in rental properties – multiplexes to be specific.
So here is a summary of my investments:
- Company 401(k)
- Car Flipping
- House Flipping
- Rental Properties
Beyond this, I think it is wise to start your own business. I have an idea in the works that will take about 100 hours to set up, but has the potential to earn over $15,000 (which equates to about $150/hr). Do some brainstorming to find out what investments are right for you. Maybe you would like to start a business, or if that seems overwhelming to you, perhaps you could be an angel investor and give an entrepreneur a chance to make it big (for a certain share of their company of course). If their business takes off you could soon be rich!
Would you ever invest in something other than your 401(k)?
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.