A retirement fund is extremely important for any employee because it allows them to have a steady stream of passive income as well as some savings just for a rainy day. This retirement fund is also known as a 401k and is a type of savings account that employers would provide for their employees in order to help their money grow. To further supplement this income, it is also good to learn how to how to invest in your 401k wisely to fully maximize its benefits.
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.
It might be a bit complicated to understand so here is an example. If one puts in five thousand dollars in a mutual fund with three percent interest, he or she will earn one fifty dollars interest income. During the next month, he or she will then earn interest based on the principal amount, which is five thousand, and the interest of the current month which is one hundred and fifty.
Basically, that is how compounding works on a monthly basis. Now, the next thing to know about would be how much of his or her salary to contribute. A good amount would be around ten to fifteen percent of total 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.
The typical mutual fund would be a large cap stock or index fund, small stocks, foreign stocks, bonds, and money market or time deposits. The percentage would be something like forty percent in index, fifteen percent foreign stock, thirty percent bonds, ten percent small stocks, and point five percent time deposits. This makes the mutual fund a diversified medium risk mutual fund.
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.
It might be a bit complicated to understand so here is an example. If one puts in five thousand dollars in a mutual fund with three percent interest, he or she will earn one fifty dollars interest income. During the next month, he or she will then earn interest based on the principal amount, which is five thousand, and the interest of the current month which is one hundred and fifty.
Basically, that is how compounding works on a monthly basis. Now, the next thing to know about would be how much of his or her salary to contribute. A good amount would be around ten to fifteen percent of total 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.
The typical mutual fund would be a large cap stock or index fund, small stocks, foreign stocks, bonds, and money market or time deposits. The percentage would be something like forty percent in index, fifteen percent foreign stock, thirty percent bonds, ten percent small stocks, and point five percent time deposits. This makes the mutual fund a diversified medium risk mutual fund.
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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