One strategy my wife and I have done with our retirement savings very early one was to max out our 401k and just forget we made more money than that. Instead of making 80k per year now I made 66k. Instead of her making 50k per year, she made 34k. That’s it. It’s that simple. We made financial decisions based on the ‘net’ not the ‘pre-tax’ incomes.
Did it impact our lifestyle? Sure, at first pretty significantly but overtime less and less. Even with small salary increases of 1-3% it chipped away at the impact the contributions made on our lifestyle.
We an “adult friend” while in college that liked to think of themselves as wise money managers give us advice one time. She told us about this thing called a 401k and how your employer will match your contribution so she always put in the match and she had 80k in her account. She was 45. Well, bless her heart. Today, after maxing out both of our 401k plans we have over 600k between our two plans. We’re in our early 30s.
Don’t take her advice, take ours. Max out your 401k ASAP. In 2016, the maximum contribution to a 401k is $18,000. Go ahead, do it right now. Then come back and finish reading this post. 😊
Now that you’ve logged into your 401k, done a little math and entered your new contribution amount. Congrats! Now forget you make that money. It’s not yours. It’s future-you’s money.
While you were in your account, you may have noticed another option that many 401k plans have these days. They are automatic incrementing policies you can activate that will increase your contribution by 1-2% every year. I think that kind of thinking is backwards. Max it out now and when you get a 3% raise just think of that as you can keep 3% more of your original salary.