Why Wait? Be Smart, Just Start

Today I had an interesting conversation at work with three of my co-workers. One is a bit older, in his early thirties (I'll refer to him as John*), and the other two are around my age, they are both 25-years-old (I'll refer to them as Keith and Mark*). We were talking about our company's 401k and other retirement vehicles like the Traditional and Roth IRA. Warning: This is a lengthy post.

The Savers

John and I both contribute to our company's 401k retirement program. I contribute 8% of my pre-tax money into my account every month. John contributes a similar amount. We both have been working for the company for over 3 years and we've been part of the program from the start. We also get the 4% company match every month. (Our company matches 100% on the first 3% and 50% of the next 2%, it comes out to be 4% of our salary. It gets vested after you've been participating in the program for two years or by your third year of employment with the company, which ever comes first.)

The Naysayers

Keith and Mark have been with the company for about a year and a half. Our company automatically enrolls new employees into the program with a 10% contribution, but you'll have to opt-out or change the the contribution amounts yourself online. Keith decided that he didn't want to be a part of it and opted-out since he didn't think he was going to be at the company long enough to be vested. Mark had some money in it, then decided to contribute 0%, but didn't necessarily opt-out. He though the same - that he wasn't going to be around for two years.

We had talked about the company-matched 401k previously and I think we might have changed Mark's mind to at least contributing 5% so he can get the match. It's free money... you don't throw away free money. That's just crazy. I also mentioned to him that he can always roll his 401k into his next job's 401k or into his own IRA plan when he leaves. I just found it interesting that Keith and Mark had misunderstandings about the 401k and IRA. Keith also didn't know the difference between a traditional and Roth versions of both. We're engineers, we're usually good at finding information and mining data. Apparently when it comes to personal finance and retirement, we're not all great at finding and using that information.

The Excuses

Mark told us that he didn't trust our company enough to put money into the 401k (the savings program is managed by Hewitt, used to be Fidelity). He didn't think he was going to be around long enough to see the company match be vested. He's supposedly going to start contributing after his wedding. All this time he was missing out on free money. Assuming he makes about $70,000 per year, he's missing out on $2,800 every year he doesn't contribute to the 401k, let alone the potential growth of those matched funds in our company's employee stock options (that's where the company's match ends up and they're currently doing very well).

They both keep their money in a local savings account and not a high-yield one... probably making 0.01% if they're lucky. This money's not even keeping pace with inflation! If they're going to put it in savings, then at least put it in a high yield one online - I use American Express Personal Savings Bank. I currently get .85%. When I signed up a year ago, it was a bit higher at 1.3%. Not bad, but not great. That's why I have a Roth IRA with TD Ameritrade and my return is currently 8%. Better, but it needs some work.

I came across this article on Ramit Sethi's blog about people who procrastinate investing and saving, Code Words: Why We Don't Work Out. Be smart, just start. That's my advice to my coworkers. Compounding interest is your friend. Yes, you'll need to know a bit about where to put your money, but hey, we all need to learn this information and it's available all over the internet.

So check out Ramit's post and let me know what you think. Are you procrastinating or are you participating?

* Names have been changed.