I have been asked by several people to write this article. I have been a little reluctant to do so, because some people just should not be doing it. Why would I say that? Well, if you have credit card debt and other consumer debt, you probably shouldn't be investing your money anywhere. Your first course of action should be a couple of things, pay off your consumer debt, other than your home, and to save 3 - 6 months of income in a high yielding savings account or CD. That seems pretty crazy for me to say, right? Don't invest for your retirement! Well, here is the reason. First, if you have a credit car or a loan at 9% and you invest your money and make 10%, then in affect you have only made 1%. This is less than inflation (~3 to 5%), so you are now down 2 - 4%. If you were to just pay off that debt, you would in effect be making a 9% return by paying that off. The other reason why I say you don't invest in a 401k right off is that if you don't pay off your debts and put money into an EMERGENCY FUND, that 3-6 months of income, you will always be in trouble. If you were to just pay off your debt and not have that emergency fund, you would have to keep taking money out on your credit cards every time an emergency came up and you would be in a revolving circle.
Now, with all of that being said, you would be a fool not to invest in a 401k plan if you did have your debt paid off and had an emergency fund, or at least the start of one. You should check to see if there is an employer match involved to your 401k. "If you work for a company that matches 2 for 1 then that would mean that for every $1 you invest into your 401k, your employer invests $.50." You are already making a 50% return, not bad at all. However, I tell you this with caution, most employers match only up to 6% of your income, as long as you are putting that much in. I would recommend that you put in the max you are allowed to put into your 401k that your employer will match, and the rest should be in alternative investments.
One advantage to invest in a 401k is the simple fact that they auto deduct the contribution from your paycheck, making it easier for people that lack the discipline to save their money once they receive it. There are also tax advantages to investing in a 401k plan. "Generally, contributions to your 401k are made pre-tax, which saves you the amount contributed times your tax rate. For example, suppose you have an income of $100,000 without contributing to your 401k. If you contribute $10,000, then your taxable income will now be just $90,000. If you were taxed in the 30% bracket without having made the contribution, you would owe $30,000 in taxes. If you make the contribution however, you would only pay $27,000. You save $3,000 in taxes for contributing to your own retirement!"
Another tax advantage to the 401k is that all of your earnings from your investment are tax deferred.
One thing you definitely want to find out regarding your 401k is the vesting period. Usually you have to work a certain number of years before the employer contributions are vested. Being vested simply means that those funds now belong to you and you can do with them as you please.
Now I realize that this is a basic 401k blog, but I think it should at least help get you started. If you have any questions, please feel free to ask! That is what FeedTheBull is all about.