For those who want to prepare for the future, a retirement fund is usually necessary so that one can have some form of safety net that can generate even some small passive income. For most countries, this retirement fund is known as the 401k and is a kind of account wherein employers cut out a part of the employees salary and deposits it as contribution. While the entity handling the fund usually grows the money for the employee, it is also important to know how to invest in your 401k wisely to really take advantage of the fund.
The first tip to take note of would be to simply start off very early. There is no magical number or age as to when one should start but it really should be when one starts earning his or her first paycheck. This is to help take advantage of the compound interest that will be given to the employees through years of contribution.
As mentioned above, compound interest is what will be applied in this retirement fund. Now, just to give an idea, compound interest is the type of interest that compounds over time through monthly interest percentage. As compared to simple interest, one can earn much more through compound interest.
Just to illustrate how it works, here is an example. So if one puts in five thousand dollars with an interest rate of 3 percent, he or she will get five thousand one hundred fifty in interest at the end of the month. Next month, he or she will then get three percent of five thousand five hundred next month.
As one can observe compounding fully accumulates the amount of money every month. However, before one can have compounded interest, one must first know how much to contribute so that he or she can have adequate savings but still enough to pay for bills. A good percentage would be something like ten to fifteen percent contribution out of the monthly salary.
Another thing that one would have to consider is which investment mediums to put money in. With mutual funds, one can choose where his or her money goes to and the fund manager will be the one to monitor the money. Of course, the specific mediums that one will choose will all depend on his or her personal preference and risk tolerance.
A mutual fund would usually have a standard collection of index funds, small stock funds, bonds, time deposit, and foreign stocks. One can choose the percentage of each of these mediums. A good, medium risk percentage would be forty percent index fund, fifteen percent foreign stocks, thirty percent bonds, ten percent small stocks, and point five percent money markets.
These are some things to take note of when investing in your 401k money. Always remember that financial literacy can help one be able to fully utilize the capacities of the retirement fund. That way, one will know exactly how much money he or she will make in passive income.
The first tip to take note of would be to simply start off very early. There is no magical number or age as to when one should start but it really should be when one starts earning his or her first paycheck. This is to help take advantage of the compound interest that will be given to the employees through years of contribution.
As mentioned above, compound interest is what will be applied in this retirement fund. Now, just to give an idea, compound interest is the type of interest that compounds over time through monthly interest percentage. As compared to simple interest, one can earn much more through compound interest.
Just to illustrate how it works, here is an example. So if one puts in five thousand dollars with an interest rate of 3 percent, he or she will get five thousand one hundred fifty in interest at the end of the month. Next month, he or she will then get three percent of five thousand five hundred next month.
As one can observe compounding fully accumulates the amount of money every month. However, before one can have compounded interest, one must first know how much to contribute so that he or she can have adequate savings but still enough to pay for bills. A good percentage would be something like ten to fifteen percent contribution out of the monthly salary.
Another thing that one would have to consider is which investment mediums to put money in. With mutual funds, one can choose where his or her money goes to and the fund manager will be the one to monitor the money. Of course, the specific mediums that one will choose will all depend on his or her personal preference and risk tolerance.
A mutual fund would usually have a standard collection of index funds, small stock funds, bonds, time deposit, and foreign stocks. One can choose the percentage of each of these mediums. A good, medium risk percentage would be forty percent index fund, fifteen percent foreign stocks, thirty percent bonds, ten percent small stocks, and point five percent money markets.
These are some things to take note of when investing in your 401k money. Always remember that financial literacy can help one be able to fully utilize the capacities of the retirement fund. That way, one will know exactly how much money he or she will make in passive income.
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