There’s a discussion on whether to invest in a 401K or pay off debt going on over at Free Money Finance.
A FMF reader started a new, higher paying job and is deciding whether to invest the increased income in the new employer’s 401K or use it to pay off debt with interest rates of 8.9% and lower.
When I was a new college graduate, 28 years ago, my first big money goal was to save a down payment to buy a house. I didn’t plan to invest in the company savings plan when I became eligible after 6 months of employment.
A coworker pointed out that our employer matched 2/3 of the first 6% of salary that we contributed to the savings plan and encouraged me to invest something. Looking back, it may be the most important advice I ever received.
I started out investing 2% of my salary the first year and increased the percentage at raise time every year. Within a decade, I was contributing the maximum 16%.
I’m all for paying off debt and living debt-free. But it is also very important to start long term savings early. The magic of compounding multiplies your original investment at an ever increasing rate. You can retire with a a million dollars by saving $8,200 a year for 30 years or $20,200 for 20 years or $63,900 for 10 years, assuming an 8% return. That’s saving $245,200 vs. $404,600 vs. $639,200.
I’m currently 51 years old and have been retired for 2 years. I am debt free.