Money Management

You could save hundreds of thousands toward retirement this way. 

Financial influencer Graham Stephan recently shared what he thinks is one of the “greatest drivers of wealth creation.” He’s referring to 401(k) plans, which are employer-sponsored retirement plans where you can save for retirement through automatic deductions from your paycheck. These plans allow you to invest in stocks, bonds, and sometimes other assets to grow your money.

The average 401(k) balance shows just how powerful this tool can be. Americans 65 and older have an average of $279,997 in their 401(k)s. If you have an opportunity to contribute to this type of retirement account, it’s a smart choice.

Why a 401(k) is one of the best ways to build wealth

There are two big benefits of 401(k)s that make them great for building wealth:

Tax savingsEmployer 401(k) matches

Traditional 401(k) plans offer tax-deferred earnings. You’re allowed to deduct your 401(k) contributions on your taxes. This lowers your taxable income. You don’t need to pay taxes on the money in your 401(k) until you withdraw it.

Some employers also provide the option of opening a Roth 401(k), which offers a different kind of tax savings. With a Roth 401(k), you pay income taxes on contributions when you make them. However, your withdrawals in retirement are tax-free.

Many employers also offer what’s called a 401(k) match. This is when your employer agrees to match your 401(k) contributions, up to a certain amount. For example, one common matching structure is $0.50 of each $1 you contribute on the first 6% of your salary.

Let’s say you make $50,000 per year and your employer offers this type of 401(k) match. You could max out the offer by contributing $3,000 annually to your 401(k). Your employer would then add in $1,500.

Graham Stephan says that “the rule of thumb when your employer offers a 401(k) match is to always take it, no matter what,” and he’s right. It’s effectively free money, and it’s an easy way to boost your retirement savings.

How to save for retirement with a 401(k)

If you don’t have a 401(k) yet, the first thing to do is see if your employer offers one. There is also an option for self-employed workers with no full-time employees, called a solo 401(k).

Talk to your employer to see its 401(k) plan options and check if you’re eligible. Employers sometimes have eligibility requirements, such as completing one year of service. Once you’ve confirmed you’re eligible, there are a few things to do to set up your 401(k).

If your employer offers both a traditional 401(k) and a Roth 401(k), you’ll need to decide how you want to allocate your money. You may want to split your contributions between the two. That way, you have some tax-deferred contributions through the traditional plan, and tax-free withdrawals through the Roth plan.

Next, decide how much you’re going to contribute. If your employer offers a 401(k) match, try to at least contribute enough to max this out. Also, keep in mind that there are annual 401(k) contribution limits. The 401(k) contribution limits in 2023 are $22,500 for those under the age of 50 and $30,000 for those age 50 or older.

Last but not least, pick what you’re going to invest in. Investment options depend on the plan provider. 401(k) plans typically offer a selection of mutual funds. Other fund options, such as target-date funds built for a specific retirement year, may also be available.

It doesn’t take too long to get your 401(k) ready to go. One last thing to remember is to avoid withdrawing money from your 401(k) until retirement. Withdrawals before the age of 59 1/2 have a 10% early withdrawal penalty, and taking out your money early means it won’t have as much time to grow. You’ll get the best results by contributing regularly and only tapping into your 401(k) after you retire.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Lyle Daly has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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It may not be the best option. 

From the start of 2022 through the end of it, consumers had no choice but to grapple with soaring inflation. As a result, many people racked up scores of debt on their credit cards. A lot of people also had to continuously dip into their savings accounts to make ends meet. And now, some consumers are looking at empty bank accounts as a result.

Unfortunately, we’re not done with rampant inflation. Though living costs have come down a bit in certain categories (notably, gas) compared to mid-2022, things are still more expensive than usual. And it may be quite some time until inflation levels drop to a notable degree.

If you’re having a hard time keeping up with your living costs in light of inflation, you may be thinking of getting a personal loan to buy yourself some leeway. But is that a good idea?

Borrowing money right now might backfire on you

A personal loan can be an affordable way to borrow money when you compare it to other options, like running up a balance on a credit card. But one thing you should know is that right now, borrowing costs are up across the board, whether you’re looking at an auto loan, a mortgage loan, or a home equity loan. And so if you take out a personal loan, you might get stuck with a higher interest rate than you’d like — even if you’re a borrower with solid credit.

But that’s not the only reason you may want to steer clear of a personal loan to get through this period of inflation. If you’re having a hard time paying your essential bills, how are you going to manage a monthly loan payment on top of that?

That’s why taking out a personal loan for the express purpose of coping with inflation isn’t necessarily your best bet. It’s one thing to take out a personal loan if you have an immediate financial need to address, such as your vehicle or home needing repairs. But if money has gotten very tight, the last thing you probably need is another bill to deal with every month.

A better way to cope with inflation

If you’re having a hard time keeping up with inflation, rather than turn to a personal loan, try reworking your budget and cutting as many expenses as possible. Granted, if you’re maintaining a very frugal lifestyle already, there may not be many expenses to cut. But if you review your bank statements and credit card bills line by line, you might manage to identify some costs to slash.

At the same time, consider getting a side job to boost your income. If you can barely pay your bills right now, but you’re able to grow your income by $100 a week with a side gig, that could make a huge difference.

Taking out a personal loan makes sense when you have an emergency expense you can’t pay for with savings. But it doesn’t necessarily make sense to take out a personal loan to simply give yourself some more leeway in paying your bills — not when borrowing rates are as high as they are today.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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The best way to grow up may be to stand on your own two financial feet. 

In 2022, a record number of young adults between the ages of 18 and 29, lived with their parents. That’s the highest level since 1940. These so-called “boomerang kids” are either staying at home or are back home for a variety of reasons.

According to the financial planning company Prudential, some are staying with mom and dad so they can save up to buy a home. Others want to pursue higher education or simply enter the job market later.

“Many parents will do whatever it takes to make sure their kids land on their feet and are ready to take on the world around them, and that includes financially supporting young adults ‘boomeranging’ back home,” said Susan Somersille Johnson, Prudential’s chief marketing officer. “For many families, this can dramatically change retirement plans.”

If your household includes adult children, you may wonder how much you should expect of them. Should you charge them rent? Here’s what one financial expert has to say.

It’s a hard yes

Ex-Wall Street trader and internet superstar Vivian Tu goes by the handle YourRichBFF. Tu dispenses financial advice via her website and through many social media channels. When addressing the issue of adult children paying rent to live with their parents, Tu leaves no question as to where she stands on the subject: Parents should be charging rent. Tu’s reasoning is as follows:

Young adults living at home have more discretionary income that is not being spent responsibly. Tu points to the fact that these young adults are driving a luxury spending boom. According to financial services company Morgan Stanley, the record number of adults living at home is helping drive the boom for luxury goods in the U.S. and UK.Of those luxury goods Tu said, “While some pieces are investments, most will go down in value. And it’s not fair to throw your money into a pit while someone else is covering your necessities.”Having an adult child at home makes it tougher for parents who count on a pension, 401(k), or savings to get by. After all, they’re adding to their parents’ utility and grocery bills.Adult children should pay rent, even if their parents don’t need the money. She suggests that financially secure parents collect rent and put it away in a savings account for their child. “Ideally, this will get your kiddo out of the nest, on their own two feet, and paying their own rent sooner rather than later,” Tu said.

Tu is not alone

Tu is not the only financial guru to suggest that adult children living at home pay rent. According to SmartCapitalMind, financial experts agree that parents should charge rent to adult children living at home or in another property the parents own. Financial advisors have seen cases in which young adults don’t learn to take the obligation of paying rent seriously and end up deeply in debt.

Young adults who understand that rent and fixed living expenses must be a priority are less likely to fall short on housing payments later on.

Psychologist Dr. Henry Cloud once said, “To rescue people from the natural consequences of their behavior is to render them powerless.”

If what Dr. Cloud said is true, perhaps the kindest thing you can do for your adult child is to allow them to pay rent.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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