Am I Ready to Invest in my 401(k)? 3 Easy Questions to Help you Decide

September 15, 2020

Not everyone should invest in their 401K. That sounds crazy, right? It’s only a select few, but if you’re in this group, it’s important to take care of business before you invest in your retirement funds. It will set you up for the future much better if you do these three things.

 

Do you Have an Emergency Fund?

If you don’t know the term, you probably don’t have one. Now’s the time. An emergency fund is a liquid asset you have on hand for emergencies.

Your car breaks down, you have a medical emergency or your A/C breaks. You didn’t have those costs budgeted, so it throws you for a loop. If you don’t have an emergency fund, you may not be able to pay for them.

An emergency fund should have 3 to 6 months of expenses in it. You may want more given the state of our economy, especially if you’re in a ‘rocky industry’ that is still laying off, but at the very least, have 6 months of expenses saved.

 

Do you Have High-Interest Debt?

Paying high credit card interest charges is a huge opportunity cost. You’ll never recoup a 19.99% interest rate or higher with any investments, so investing rather than paying off credit card debt causes you to lose money.

If your credit card debt is under control, meaning you can reasonably pay it off in the next year or so, go ahead and invest in your retirement funds. If you can’t see the light at the end of the tunnel though, get out of debt before or in addition to your retirement fund contributions.

 

What’s my Risk Tolerance?

This is big, especially if you’re about to fund your retirement account. How much can you stand to lose?

The more risk you take, the greater the reward. But there’s always a flip side – the greater the risk, the larger the losses too. How much can you stand to lose and not lose sleep at night? 401Ks usually have a few conservative investment options, but make sure they’re right for you.

If you go too conservative, you cut yourself short. But if you go too aggressive, you could end up with less money than you need in retirement.

Sit down and think about what you want to risk before making that first contribution.

 

Are you Ready to Invest in your 401K?

If you look at these questions and think that there’s no way you are ready, then wait. Put steps in place to fix the other issues. Budget for your emergency fund, and have enough money to fund an emergency quickly.

Put debt payoff in your budget too. Typically, allocating 20 percent of your income for debt payoff and savings offers a good balance. You’ll still have money to pay your fixed and variable expenses (including fun), but can take the steps forward to protect your future, especially retirement.

If you’re finding trouble answering any of these questions, but have an employer match, take a look at Lendtable. We can help you reduce the risk on all fronts when it comes to investing in your 401(k)!

Rahul Iyer