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What's a 401(k)?

Transcript

What's up Internet? My name is Ian Bloom and this is Nerd Finance. I'm your resident financial life planner and huge nerd!

So, our topic today is "What Is a 401(k)?" and in Nerd Finance terms 401(k)s are kind of like Spindas from Pokemon. They're all pretty much the same, but at the same time they're all a little different from one another. So, we'll cover them a little bit here, but ultimately, they're gonna be pretty unique to the one offered at your employer.

Section 401, subsection K, of the IRS tax code describes what a 401(k) is. So, the name is not very complicated. It's just from a document.

They are ultimately retirement plans with your employee contributions (from your paycheck) either on a deferred basis or an after-tax basis going to the 401(k), often with a match from your employer. I won't be covering the differences in a traditional or Roth 401(k) as much here> But ultimately, know that if you make traditional contributions your dollars are not taxed that day, but they will be taxed when they're withdrawn from the 401(k) later. And, if you make Roth contributions your dollars are taxed today, but will most likely not be taxed at withdrawal. So, depending on your tax situation, the advantages, and how long you have till retirement there are a couple of different ways you can handle it.

Most 401(k)s have different investment options - typically mutual funds. And mutual funds are very unique, kind of like baskin-robbins flavors, you can almost find a different one every time you look for them. The difference between mutual funds is ultimately not that great, and as long as you know what categories you're looking for you can probably select the options in your 401(k).

Know that if you don't select one there's often a target date fund which is a specific type of mutual fund that your employer put you into and those can be okay. They are based on the life cycle that you have, but ultimately, they're probably not the most efficient way for you to have your money invested. So, think about that and maybe work with an investment professional on how you should be allocating your 401(k).

All the money in your 401(k) is your money unless it was contributed by an employer and most of the time even your employers funds can be taken with you if you leave the employer (after a vesting period). Given that, you have the ability to move this money around if you should leave your employer and it's your money for retirement. That said, don't necessarily move your money just because you've changed employers. You'll want to know what the terms of the next employers 401k are, or what your other investment options available to you are out in the open market, before you decide what's best. So, doing some of that research can pay off pretty big.

The last question I get surrounding 401(k)s is "How much should I save?" and that's kind of a "Well, it depends." sort of thing. I can't really give you specific directions until I know your circumstances. Just like in strategy games, it's really hard to tell people what the best strategy is until you know what the enemy they're up against is. When you're looking at a financial plan there are different ways to tackle all sorts of issues and it's going to depend on what the circumstances of the individual are.

That said, there's a pretty good hard and fast rule that saving at least as much as you need to earn the match is probably going to benefit you in some way. Free money is free money, and you might want to take that from your employer.

There's a lot of layers to investing in 401(k)s and 401(k)s themselves, but I wanted to make sure to provide at least an overview here since they are a very common investment vehicle and people often ask me about them.

So that's all for today. Thanks for tuning in to this episode of Nerd Finance. I hope there was enough nerd and just enough finance in there for you - but if you have suggestions future videos, content you would like to see, comparisons you would like to see made, follow us on social media @openworldfp on Twitter and OpenWorldFp on Facebook and LinkedIn. You can also subscribe to this channel or check out our website at openworldfp.com. Thanks so much! Have a great day!

What Do You Mean Pay Me First?

Transcript

What's up Internet? My name is Ian Bloom and this is Nerd Finance. I'm your resident financial life planner and a huge nerd! Since this is my first video I wanted to give you a rundown of what you're in for.

This is a series of informal financial videos that answer questions that I get every day. So, I'll drop in a few nerdy references to try to make things fun, but ultimately you've been forewarned. This is financial content.

So, paying yourself first is our topic today and not in the traditional way it's been addressed. Most people talk about paying yourself first on articles, videos, blogs, it's it's all over the place because it is such an important part of planning. But, they don't really discuss why you, should do it what you should do it with, and they definitely don't reference Runescape. So to start off with let me get to the Runescape reference.

Paying yourself first is all about incremental gains, right? It's about accumulating money over time that would otherwise be used for going out to eat or something. Well, Runescape is all about delayed gratification and an incremental gain. So, in Runescape you might get 25 XP per mining copper, but to get your mining level up you might need 1500 XP. That means you're gonna have to mine a lot of copper to get there. However, doing that has its own reward. At the end of it you have a higher mining level.

You can do other stuff that's pretty similar in the real world. Saving money over time allows you options and choices.

So, here's the good news. You already probably pay yourself first somewhere. Most people save in a 401k or retirement plan over time and that counts that as paying yourself first. It means that you're deferring some of your paycheck without the ability to interfere with it to a retirement account. And while retirement accounts don't count as an emergency fund, because you really shouldn't be accessing them ahead of retirement in most circumstances, they do still have incremental gains over time and therefore can be a very significant amount of your retirement income stream later on.

Another place you can pay yourself first is in banks through automatic transfers from and checking to your savings account. They're pretty easy to set up at most banks and all that needs to be is maybe $25 a month, or whatever feels comfortable for you. But, having that move from your checking to your savings account, whatever the amount that is comfortable for you, will accumulate over time and it'll save you from the next popped tire, broken water heater, or something like that. That would otherwise be put on your credit card and accumulate interest.

Now, that's not to say credit cards are all bad, because in some cases if you pay off your credit card every month you are actually paying yourself first in a small way. Credit card points and miles are a good thing to accumulate for travel purposes or for some of the niceties in life...the luxuries that we like to spend our money on. Let's face it, people like to take vacations. And so you would probably be spending money on vacations anyway. Well, if you accumulate those travel miles instead and you use those instead of mostly money to fund your vacations then that's somewhat saving money as long as the money that you didn't use on the vacations ends up in your savings account, of course.

The last place to pay yourself first, or the last way you can, is to accumulate money for other investments. Whether that's a brokerage account, Roth, or other types of savings. You may have extra at some point in your life and accumulating that will only help you in the long term. Now what vehicle you use might be dependent on your individual situation, so I'm not going to recommend specifics here today.

That's all for today. The video was probably a review for some of you, so I promise we'll dive into something more intricate and complex next episode. If you have any ideas for future episodes or you would like to engage with me I'm @openworldfp on Twitter at @ianhbloom there for me individually. You can also find my company on Facebook and LinkedIn. Lastly, This email address is being protected from spambots. You need JavaScript enabled to view it. is my email, and you can find my website openworldfp.com where you can also look at what my services would be like as a financial life planner - if all this sounds like a lot to you. Thanks so much! I hope you have a great day!