John wrote a great post the other day about what investments you should have in your 401k. It was really informative and made me think about a big investing mistake I made when I was first starting out. I still consider myself a amateur investor, but I am slowly learning much more. I have a 401k, Roth IRA, and a Scottrade investment account. I like the idea of making money with the stock market, but I also understand the risk. My understanding of investing has really grown since I started blogging and I am glad for it. There is so much to know when you start out with investments that it can be overwhelming for many. I can see why some don’t ever do it. There are so many places to start that some just don’t start at all. I would say this is a bad idea, but I do understand it. What I don’t want you to do is what I did when I first started investing. I had a 401k with my employer and ran it poorly. Don’t make this investing mistake.
Paying Debt and Investing
I have always been a proponent for paying down debt and saving money. I consider investing part of saving money. You really only can reach retirement if you have investments. It is still the best way to make money for retirement. I even created a debt/saving allocation method when I was in debt. The concept for my method came from retirement investment allocations. When you are young, your investments tend to be aggressive then turn conservative when you are older. This is a basic method, but it makes sense. You can do the same thing with investing.
While I was saving money and paying off my debt, I was more focused on my debt. This wouldn’t be a problem, except I wasn’t investing to my potential I had setup my 401k and then just put it on cruise control. My employer would add money to my 401k before my paycheck, so I never saw the money. It was easy. Unfortunately, easy doesn’t always mean the right way.
Ignoring Company Match
I have to admit I was really dumb when I was younger. Being so focused on my debt and thinking my 401k was running smoothly, I didn’t think about a company match. When I first started at the company I am currently still with, there was no company match. This means they wouldn’t match any of the funds you put into your 401k. While I didn’t really have a problem with it, it wasn’t very competitive in our area.
I wasn’t taking much from my paycheck in order to invest. My main focus was my debt in the beginning, so the rest could go to investing. One day my company decided to offer a match. I said “cool!” and moved on with paying down my debt. What I didn’t do was change my saving percentage to cap the match. This means I was leaving free money on the table. The worst part is I left free money on the table for close to 3.5 years. I think about it now and it really pisses me off. How could I leave free money on the table?
You can’t get back lost returns. Investing is all about compounding interest. Your money earns money throughout the year and that money then earns money throughout the years to follow. Money just builds on top of money and that is how you gain money to retire. When you don’t take advantage of company matches, then you will have to put more funds in to cover the loss returns.
Watch the Fees
John indicated this in his post. I started thinking about my fees and remembered once issue when I had my 401k. When I first learned that I could pick my own funds and investments, I decided to look around. The big problem is I only focused on the average return of the funds. I didn’t look at the risk or the fees associated. Fees can kill your returns in a second. Luckily I didn’t move everything over to this fund as I am a fan of diversification. What I did move over just got all of the returns eaten by management fees. It was terrible. While the returns were awesome, the fees were terrible.
My best advice is to always pay attention to fees. Not only do you need to understand how much it costs you to have a fund under management, but also how much your management fee is. There are a lot of providers for investment accounts. Their fee structures are all different. Some are low and some are really high. Always question the fees and understand how those fees work into your investing goals. Paying high fees over many years can really erode your returns.
Never be afraid to invest when you are paying down debt. I think you really should be doing both. If you do end up paying down debt and investing, then make sure you are active in the account. Don’t just set it and forget it. Understand if your company is providing a match into your retirement account. If they are, then contribute up the the company match amount. It is really hard to make up for lost returns. After all of that, keep your eye on all fees you pay. While you might not have much of an option when you are still working at the company managing the 401k, you might have options to what funds you invest in.
Are you guilty of doing any of these investment mistakes?
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