What could be more exciting and nerve-racking than your first day of work? You’re probably hoping you won’t spill coffee on your new suit or say something really stupid to embarrass yourself on day one. Well here’s something else to freak you out: You may have to make a decision today that could affect your entire financial future. You may be asked to make your 401k investment choices.
Egads . . . How is that possible? Technically, that is a bit of an exaggeration. Choosing where you will invest your retirement money is not a decision that is made in stone. The sad thing is though, that many young adults have no clue as to which 401k choices to make and therefore may choose foolishly, not revisiting their choices until they have lost their opportunity to make a lot of money.
Many times a new employee is handed a packet of forms on the first day on the job and told to “fill these out.” The HR department has seen that blank stare from newbies many times. It is the look that says “I will pretend I know what I am doing here so that I don’t look stupid.” Unfortunately, the HR people don’t often explain personal financial choices. Therefore, many questions go unasked as well as unanswered.
Here’s the good news: even if you chose to put all of your money into a fund that isn’t such a great choice for you, you can change it later. The important thing to note is that you should do some research into investing so that when you do make those choices, you have some idea of what you’re doing.
Did the word “research” make you shiver? Does the thought of looking for answers make you feel helpless? Fear not . . . if you have absolutely no idea what to do with your money, here are a few suggestions to help you decide:
• If you can, take the maximum amount of savings out of your paycheck to put toward your 401k. In 2009, the most you can contribute to a 401k is $16,500/year. If you are lucky enough to put that much away, you are probably making a pretty decent salary. Good for you! Even if you never reach that maximum amount, you should still be saving. Remember, if you take it when you first start your new job, you’ll never notice it is missing. If you get used to having the money and try to take it out later, it will hurt a lot more and you may never change your deductions. Do it now!
• Don’t be afraid to ask questions about the investment choices your company offers. Many companies have 800 numbers set up to respond to these types of inquiries.
• If you are not planning on keeping a close eye on your account or on what the market is doing, you might be best served to put your money into a life-stage based account. There are mutual funds set up that are based on your current age. As you grow older, the risk within the account adjusts to your needs. For example, when you are younger, you can handle a riskier investment because you have time to make up for any market fluctuations. As you age, your tolerance for risk becomes less. By choosing an age-based account in which to place your money, you are avoiding having to move money around later in life. This might be a good choice for the investor who does not want to keep up with the market. Ask if any of the choices you are offered are these types of accounts.
• Remember that if you are having the same amount of money being taken out of your account every month for your 401k, you are doing something called Dollar Cost Averaging. This means that because the same amount of money is used to buy funds every month, if the stock prices are low, you are buying more of them and if the stock prices are high, you are buying less. In the end, you are going to end up ahead. It’s a smart way to invest.
By simply following these few suggestions, you will be way ahead of the guy next to you who is sweating out his choices! If it’s been a while since you made these choices at work, go back and look at your decisions. Be sure you have taken the maximum out and if your money is in a fund that you don’t understand, ask questions. It’s your money; you have the right to keep it!
Diane Hamilton has a BS, MA and Ph.D. in Business Management. Her experience includes working in several industries including pharmaceuticals, banking and real estate. She has trained corporations in areas such as time management, emotional intelligence and Myers Briggs. She currently works as an online professor, working for 5 different universities. She teaches mostly business-related courses to bachelor, master and doctoral level students as well as mentors doctoral learners. She is in the process of writing a personal finance book for the young adult. Diane can be reached through www.drdianehamilton.com.