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How Much Should I Contribute to My 401K? | 1 min money talk

What is a 401K?

Your 401K is a employer sponsored tax-advantaged account where you can invest money from your paycheck before the government has taken taxes out of it.

 

Why Should I Invest With a 401K?

Investing in a 401K is a good idea because the money gets to grow with money that would have otherwise been given to the government. Your 401K contributions also lower your taxable income, so for example if you make $50K a year but invest $5K in your 401K, you’re only taxed as making $45K a year.

 

How Much Should I Be Contributing to My 401K?

Basic wisdom says you should at least contribute enough to receive your employer match, as this is free money. So if your employer matches up to 5%, then you should at least contribute 5%.

 

Beyond that, you should try to increase it as much as possible until you reach the max contribution amount, which is $18,500 a year as of 2018.

 

That said, start with baby steps. So try to start with 5%, then each 3 or 6 months raise it a percentage. Ideally, after a few years, you’ll be at 10-20% and then a few years later you’ll be maxing it out.

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