Michael on December 5th, 2007
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Even if your employer doesn’t match your contributions to your 401(k) plan, saving money in your retirement plan is still a solid financial move. First, there are the well-documented advantages of an automatic savings program (Saving Strategy # 9: You won’t spend what you don’t see!)

In addition, the moment you make a contribution, your net worth increases by the amount you save in income taxes. These tax savings are a direct result of your decision to move money from your right pocket (where your wallet is) to your left pocket (your 401(k) plan, where the money is still very much yours but from where it is far more difficult to spend).

If you contribute $100 to your 401(k) plan, your paycheck will decrease by an amount less than $100. This is because you would have paid tax on the money had you received it in your paycheck. (For example, if your withholdings rate is 25%, your net pay would decrease by only $75.) Yet, at the same time, the full $100 contribution amount is deposited in your 401(k) plan.

So, you gave up $75 to get $100.

Pretty good deal, right?

You: Indeed.

And though it almost sounds to good to be true, it’s a chief benefit of a 401(k) plan. It’s also why your net worth goes up by $25 simply by making this contribution—with no risk. As regular readers of this blog know, a guaranteed return with no risk is pretty much fiction. But this is one of the rare exceptions.

And remember, this net worth increase is before any of your investment earnings. Once the $100 is in your retirement account, you can invest the money for the long term and watch it grow over the decades. By the time you retire, it may be worth many times what you originally put in, all for a one-time $75 sacrifice.

Given how easy it is to save money on taxes while growing your net worth and retirement savings, take advantage and start living Beyond Paycheck to Paycheck today.

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