Compound interest has me under its spell. And so does the idea of free money.
When my spouse first took the job he has now, he had to wait a year to contribute to their 401K program. He had a 401K at his previous position, which he rolled over into an IRA when he was laid off from that job, so he had experience contributing to 401K plans before. But I would call us the people that the “forced savings” and “company matches as motivation” were created for – we didn’t really have much of a plan or reason behind how much we contributed, we just picked a number that seemed okay and went with that. The definition of seemed okay is debatable.
This position he has now, the company matches 20% of your contribution up to you contributing 6% of your income. To explain that further – for every dollar my spouse contributes, the company contributes 20 cents. Once my spouse reaches a 6% contribution, the matching maxes out and any money my spouse contributes on top of that is not matched. Once he is there for 5 years, the company contribution fully vests (which means it then completely belongs to my spouse), which actually will happen this year – next month to be exact. This is not the most amazing 401K program ever, but at least there is matching of some sort – and a 20% return on investment immediately is not too bad at all.
When my spouse started contributing, we started at 2% because we felt we wouldn’t notice the change in paychecks too much. In hindsight, we should have just started at 6% and been done with it but hindsight is always 20/20. We have increased it twice since then, once about a year later to 3% and then once when I started this blog to 4%. This year, when my spouse got the notification that he could change his % contribution, we upped it to 6% at once instead of just 5%. His next paycheck will be the first the the new amount (hopefully followed within the next month by a raise since his annual review is at the end of April, but we’ll see) so we’ll see what the effect on his paycheck is, but I know we’ll adjust. With my new position bringing in more money per month, I knew it was the right thing to do to stop leaving part of the company match on the table and take advantage to the fullest any free money we can get. As well as increase our retirement savings – because every minute that passes is a minute of compound interest we’re not getting back.
Our retirement investing will not stop there of course, but until sometime next year (hopefully) or however long it takes us to get out of all but mortgage debt, this will have to do. And then the real fun of saving 15% or more of our income begins. But this is a positive step in taking control of our retirement for us.