She Put Her Entire Bonus into Her 401(k) - She's Begging you Not to Make The Same Mistake
Ever made a big financial "no-no"? We all have but some are far easier to undo than others. Here's one story that you can definitely learn from.
A former full-time employee, now self-employed (whoop!), regrets following the advice of her boss to invest her entire annual bonus in her 401(k) account when she was only 26 years old.
While saving for retirement is essential, there are other financial goals to consider before allocating all of your extra cash into retirement accounts.
Here are the three reasons why she wishes she had considered her other financial goals before investing her entire bonus into her 401(k):
- She Ignored Other Financial Goals: At the time, her finances were in a mess. She had credit card debt, and no financial stability, with saving for retirement being just one of the many things she hadn't started doing.
What She Should’ve Done:
By allocating her entire bonus to only one financial goal, she neglected the other critical goals. She would have benefited more at the time by creating an emergency fund and getting better at budgeting to avoid spending more and acquiring debt when those yearly “oh crap” moments came about.
2. She Missed the Opportunity to Avoid Debt: She wished she had used the bonus to start off the new year with an influx of cash. Living in a high-cost city like New York, she was not able to save much of her paycheck every month.
What She Should’ve Done:
If she had kept even 20% - 50% of the money, she could have avoided taking on credit card debt throughout the next year and paid off the current credit card debt that had lingered from the previous year. Also, she failed to account for the taxes she would have to pay that year, which would have been mitigated if she had used a portion of the bonus to pay off her tax bill.
3. She Eliminated Her “Fun Money”: After a long work year, she received a big bonus as a well-deserved reward for her hard work. However, investing her entire check in her retirement account meant she did not have any extra money to spend on herself.
What She Should’ve Done:
She could have used a portion of the money to invest in a new hobby, go on a weekend trip, or do something enjoyable. Working and grinding is awesome and shows some serious work ethic (we should know, that’s the main reason for our success). But burnout is real, vacations are not just a suggestion but a requirement to not hit the inevitable brick wall.
In retrospect, her boss's advice was based on his experience and mistakes and not tailored to her unique financial situation. While it is important to save for retirement, it is equally important to consider other financial goals before investing all of your extra cash into retirement accounts.
Key Takeaways from Salt & Pepper
Before investing in a retirement account, it's crucial to ensure that you have covered your financial bases. Investing money into a retirement account, such as a 401(k), comes with long-term implications and restrictions.
Therefore, it's crucial to prioritize the following actions before investing in retirement accounts:
- Building an emergency fund that covers 3-6 months of expenses
- Paying off high-interest debt
- Implementing a budget that allows for consistent savings each month
These foundational financial principles will help mitigate the risks associated with investing in retirement accounts and prepare you for a healthy financial future.
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