Personal Finance Tips from 401k Millionaires





Personal finance is a multi-faceted subject and includes a range of concepts like handling day-to-day money, managing credit, saving for emergencies, and saving for retirement. Perhaps the easiest of these to put off is saving for retirement. And that's a shame, because by planning for retirement sooner rather than later, you are giving your older self the ultimate gift of financial freedom, and the sooner you start, the bigger the gift.

Some 401k plans have drawbacks, like high fees, but the 401k has resulted in more Americans saving for retirement than ever. According to the American Society of Pension Professionals and Actuaries, workers are 14 times more likely to save through a 401k than they are to set up their own IRA. How much you need to save depends on several factors, including how much you'll get from pensions and Social Security, whether you'll draw on home equity, and life expectancy.

You can find numerous online calculators that will help you estimate how much you need to save for retirement. The most important thing is that you start doing so as soon as possible. Here are the fundamental personal finance tips that people who become millionaires via 401k relied on to maximize their retirement savings.

Automate Your Savings

Have money automatically deducted from your paycheck to fund your 401k. Eventually, you should be able to contribute the maximum allowable per year. If you are self-employed or your employer doesn't offer 401k savings, you can have money automatically deducted from your bank account each month toward an Individual Retirement Account, and you should work toward maximizing that contribution as well. If you automate savings right from the start, you may have to adjust some of your day to day personal finance habits, but eventually you won't miss those deductions.

Consider Fees

Some employer plans charge minimal fees of around 0.10% annually. Others charge 1% or even 2% annually. High plan fees can end up costing you tens of thousands of dollars by the time you retire. Lobbying your company's HR department to shop around for plans with lower fees may open their eyes to the amount employees are losing each year to fees, but there are other steps you can take. When allocating contributions, look for index funds, which tend to charge the lowest fees. Look at expense ratios as well as fund performance when choosing how to diversify your portfolio. Experts at personal finance never pay more than they have to in fees.

Maximize Your Contributions

Investing the maximum allowable amounts in your 401k may be a challenge, but if you work up to it steadily, you can retire having maxed out your contributions for a good portion of your career. For many people this may involve some sacrifice. Maybe it means keeping your car a year or two longer before trading up, or being more careful with day-to-day personal finance decisions. But when you reach middle age and realize you have a healthy nest egg ready for when you retire, it will have been well worthwhile. Retiring when you want, rather than having to work for years longer is one of the greatest gifts you can give yourself.

Live Frugally

Taking care with your day-to-day personal finances makes an enormous difference over time. Frugal habits may take time to develop, and it's best to start small rather than enacting draconian levels of thrift all at once. Developing a repertoire of a dozen meals you can cook is healthier and cuts down significantly on the expense of meals out. Buying a late model used car rather than new means you won't take a big depreciation hit. And simply asking yourself if you really need that $6 specialty coffee or yet another pair of dress shoes for work helps you learn to appreciate what you have and enjoy those occasional treats more. And it will make all the other steps toward a million dollar 401k easier too.

Start Today

This is probably the most important personal finance step there is. Start saving for retirement at the first opportunity. Time and compounding do amazing things for your nest egg. It's not easy to sock away money when you're in your 20s and starting life on your own. But not saving can become a habit too, and it can hurt your chances of having an enjoyable retirement. People in their 20s who put away even a little of every paycheck in a 401k or an IRA are doing themselves a huge favor. But whatever your age, if you're not saving, you should start now. Putting it off is one of the most self-limiting things you can do. Pinching pennies now isn't fun, but you don't want to be in your 60s or 70s wishing you could take a vacation or visit your grandchildren more.

Becoming a 401k millionaire isn't solely a matter of picking great investments. While you should certainly consider the diversity of your investments, the main things that separate the 401k millionaires from everyone else are the ordinary steps of automating savings, minimizing fees, maximizing contributions, watching your day-to-day spending, and starting early.

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