401k: Not Just A Bunch of Numbers and a Letter Anymore

I’m one of the lucky ones whose employer makes matching contributions to a 401k. For that reason alone, I contributed enough money to get that company match when I hired on, but only just enough to get that match. Free money, right?

In the past few years I’ve been promoted and have gotten a few modest (cost-of-living) raises as well, but I’ve never increased my 401k contribution. I had a “set it and forget it” mindset, though, and it never occurred to me to contribute more to it even though I make a little more money now. If I wasn’t getting more company match, then anything that I added above that was money that would go into nothingness, and that I wouldn’t ever get to enjoy it.

I was falling prey to a common fallacy with retirement and financial independence: it’s so far away I’ll never get there.

Recently, though, with my adventure into a simpler way of living I’ve realized that minimalism is a route to financial independence. For me, retirement isn’t 62 or 65, it’s more in the 42 to 45 range. That’s only about 15 years away! I can easily remember what I was doing 15 years ago: I was about to start high school. Really puts this time frame into perspective! At least, I don’t feel like high school was that long ago…

Anyway, this made me realize one thing, in bold neon letters: I need to step up my saving game!

Of course, I was doing this somewhat indirectly. I don’t buy stuff just for stuff’s sake anymore. I sold a ton of my junk and I don’t order non-consumable things on Amazon with reckless abandon like I once did. However, this is all after-tax saving, and the more I looked into it the more I realized there was more I could be doing for myself.

So I increased my 401k contribution a few percentage points. Even though my company won’t match my contributions above the amount I was already making, the tax shelter that the 401k provides is kind of like getting free money anyway. Even though I’ll have to pay taxes when I make withdrawals (one day!), my tax-free earnings can grow unfettered until then.

I started off with a 2% increase above what I was already contributing. This amounts to well under $100 for me per paycheck which won’t hurt me at all, and will account for well over $1000 per year at my current pay rate. I’ll look to increase this even more in the near future in order to increase my savings percentage and progress with my goal of becoming financially independent. Right now my savings rate is about 20% but with some more lifestyle changes hopefully I will be able to increase this even further.

Photo courtesy of Wikimedia Commons

Windfall Profits From Selling My Truck

OK, so I didn’t exactly make money from my truck, but I did sell it. My plan was to take this sum of money from the sale and purchase an index fund (and also use some of it to pay off some extra principal on my mortgage). Index funds are great because they’re not actively managed. They don’t try to beat the market, they just try to match it. You save a lot on fees (versus mutual funds) and you still get the great return-on-investment that the stock market generally provides. At least as long as you don’t panic.

I’ve had luck with a particular index fund in the past. After I sold my first house, I put most of the money I made from that transaction into a fund. Otherwise, it would have just sat around in my savings/emergency account doing nothing. I got pretty lucky, purchasing the fund back in October at a low point in the market and then selling them off in January at a high point in order to put a down payment on the house I’m currently living in. I made 5% on this investment in just over three months. Pretty solid!

This time around, I invested in the same fund but seem to be having opposite luck. I bought it last Monday, right before the stock market took a huge plunge. It’s recovered some, but I lost almost 3% right off the bat. It’s recovered some since then, but if I know anything about these types of funds, it’s this:

DON’T PANIC.

Index funds are good long-term investments, so while they do go up-and-down with the market, they’ll generally make you money as long as you wait it out. The market has already recovered, but it’s still down. I actually took the stock market decline as a sign that I needed to buy more, so I consider this volatility more of an opportunity than a disaster.

My plans for this fund, though, are more medium-term. I still have about $18,000 in student loans (down from $40,000 originally) that I’m trying to eliminate. $16,500 has an interest rate of 3%, and $1,500 has an interest rate of 0.08%. The plan is to put money that I’d use to pay off the loan into the index fund (while making minimum payments on the loan) because the index fund will probably do better than 3% growth. Once it reaches a point where I could pay off the entire debt, I’ll sell the index fund to pay it off.

I’m hoping this strategy gives me the best of both worlds. I’ll get the better return-on-investment by investing in the index fund instead of simply paying off the loan. I’ll have extra capital (from capital gain on the index fund) to pay the loan off. And I’ll eliminate a debt, which is my #1 financial goal at this point. (Not to mention the fact that my cash flow situation will improve without this monthly payment.) To me, this seems win-win. I just have to hope that we’re not actually in a bubble that’s about to burst. If we are, though, I’ll just have to take my financial advice from the most successful book ever to come out of the great publishing corporations of Ursa Minor!

Photo: Who needs a truck when you can have a Volkswagen and an index fund? I used the Beetle last week to take two people and one dog on an adventure in the Intracoastal Waterway. We took my paddleboard and a kayak and tied them both down to the roof. It was actually easier than getting both of them in the bed of my truck! The Beetle did great, too!