Tuesday, May 02, 2006

401k and ESPP Notes

I've made max contributions to my 401K since my first job, despite never having an employer match. Call me an obsessive saver. Back then I had zero savings, but also no debt other than my auto loan.

I highly recommend to anyone who is working full time for an employer who offers 401K, that you do all you can to contribute enough to at least collect the employer match. That is free money. If your employer fully matches your contribution, you are making 100% on your investment. Compare that to the 5% yield I'm settling for on CD's.

At my income level, I don't qualify for Roth IRA. But if I did, I would be contributing max to that every year before any non-retirement investments. This is one of the smartest investing vehicles I have come across, for those who qualify (there are cases where traditional IRA could make more sense for your situation), because your gains are tax-free! You accrue dividends and capital gains completely tax free! You just can't beat that on non-retirement investments... At the higher income levels your biggest financial worry is taxes. At lower income levels, make the tax laws and opportunities work for you!

If your company offers ESPP at a discount, contribute to that before other investments as well. More free money. My company offers 15% discount on ESPP shares. There are no no-risk investments that return 15% (if you sell those ESPP shares immediately), besides employer match on 401K. Believe it or not, I have co-workers with the same finances as me, who don't contribute to ESPP, despite years of convincing from me. This has cost them tens, and possibly hundreds, of thousands over the years.

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