Don't Miss the Match

Starting a new job can be tough because there are too many papers with numbers on them to fill out. I hear you on how overwhelming it is, and how tempting it is to skip as many forms as possible.

One paper you don't want to ignore is the 401(k) enrollment form. Don't bury it in your inbox like my gym membership enrollment. If you don't know what 401(k) actually stands for, you are not alone: Check out this MSN Money story (click on the video "What do you know about money?").

It doesn't matter whether "k" stands for karats or kilometers -- it means free money. Recently a friend called me to ask about her 403(b) plan (similar to a 401(k), and often available for teachers). She said they were matching her salary up to 3%, but she was only going to contribute 1% now. Next year she would like to save 3%.

I could understand why she wants to start off with more money in her pocket, but I agreed she should start saving more as soon as possible. Not because I think she should worry about her impending nursing home bills, but because now is really the time to do it when our only responsibility is ourselves. She lives with her parents. When she moves out, suddenly she will have all of these expenses. Before you know it, retirement will keep getting pushed to the back burner until she wakes up with three screaming kids and a mortgage!

OK I'm exaggerating.

But here's how a minor difference in how much you are willing to set aside from your paycheck makes a big difference in how much you save. Say your employer matches 50 cents on every dollar you save for up to 6% of your salary.

If you contribute 6% of your salary --> You save 9% of your salary
If you contribute 3% --> You save 4.5% of your salary
If you contribute 1% --> You save 1.5% of your salary

Kind of a big difference.

Now to really illustrate the free money you would pass up, let's show that in dollars ... Let's say you make $30k:

If you contribute $1,800 (6%) --> Your employer gives $900 --> You save $2,700
If you contribute $900 (3%) --> Your employer gives $450 --> You save $1,350
If you contribute $300 (1%) --> Your employer gives $150 --> You save $450

I admit that it might be nice to save only 3% and have that extra $900 (and maybe you just really can't do without it). But if you contribute that to the 401(k), that extra $900 basically becomes $1,800.

Yes, it's basically like those New York & Co. coupons where if you spend $30, you get $10 off, but if you spend $75, you get $30 off. Except better.

Oh, and remember that all of this savings is tax exempt on your paycheck (for right now). I like how basically I never have to know I ever had that money. It comes right out of my paycheck pre-tax and is shipped off to be invested somewhere where it has potential to grow exponentially.* Kind of a good deal.

*I have noticed lately that the stock markets aren't doing so well, but that's another story.