It’s shocking that 35% of American employees are leaving free money on the table by not getting their employer match. 401(k) accounts tend to hold the largest amount of assets in the average portfolio. In fact, 80% of millionaires invested in their 401(k) match and many credit this account as being a huge catalyst to reaching their first $1 million.

How does your 401(k) balance compare to the average American? This episode helps you discover not only how powerful this wealth building tool can be, but gives benchmarks for where most people are and where you should be in your 20s, 30s, 40s, 50s, and beyond!

In this episode, you’ll learn:

• How 2020 has affected 401(k) participants
• How many Americans are taking advantage of their employer match
• The financial power you’re leaving on the table when opting out of your 401(k)
• The average 401(k) balance of Americans in every age group
• How much you should have invested to become a millionaire

Research and resources from this episode:

• Here’s how much Americans have saved in their 401(k)s at every age (CNBC)
• Building Financial Futures (Fidelity Investments)
• Personal Savings Rate (FRED Economic Data)

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Money doesn’t come with an instruction manual, and it can be difficult to know how to optimize every dollar. The basics are simple enough; saving for retirement is good, high-interest debt is bad, but what about beyond the basics? High-level financial mistakes, like putting your kid’s college fund before your retirement or paying off low-interest debt too early, can be just as costly as missing the basics. Here are several common Financial Order of Operations mistakes you’ll want to make sure to avoid.

1. Paying off low-interest debt at a young age.

Low-interest debt prepayment is the last step in the Financial Order of Operations. This is not to say that paying off debt isn’t important, but prioritizing low-interest debt, like your mortgage, before getting your financial life in order can be costly. Before paying off low-interest debt, make sure you have your deductibles covered, are getting your employer match, have no high-interest debt, maintain an adequate emergency reserve, are making Roth IRA/HSA contributions if eligible, are maxing out other retirement options (like your 401(k)), have begun hyper-accumulating (the ultimate goal is to be saving 20% to 25% (or more) of your gross income for retirement), and prepaid future expenses, like college tuition. After all of that comes low-interest debt prepayment. 

We realize that not everyone will be able to (or even want to) pay the minimum amount on low-interest debt until they reach the last step of the Financial Order of Operations. If you are still on earlier steps of the Financial Order of Operations but don’t like the thought of paying the minimum amount on your mortgage, it’s okay to round up your payment or pay a little extra every month as long as you aren’t neglecting other areas of your financial life. Low-interest debt isn’t the same for everyone, either; a 30-year mortgage may be more appropriate for young investors with a long time horizon, and those buying their second or third home may choose a 15-year mortgage. By retirement, you should aim to be completely debt-free.

2. Saving for your kid’s college before taking care of yourself.

College tuition is expensive, and lifting that burden off of your kid’s shoulders is a great goal. However, you need to make sure your own financial life is in order before saving for college or any other prepaid future expenses. It is the next-to-last step in the Financial Order of Operations, so you should have a secure financial future before saving for your kids. There are many different ways to pay for college; there are scholarships, state aid programs for students with good grades, need-based financial aid, tuition reimbursement from employers, student loans, and more. There aren’t any scholarships or need-based financial aid available for retirement, and you probably don’t want your children to be your retirement plan.

3. Missing your employer match.

The second step of the Financial Order of Operations, right after having your largest deductible covered, is getting your employer match. Not all employers offer an employer match, or even a retirement plan, but if yours does you should take advantage of it. You’ll have difficulty finding immediate 100% or 50% returns on your money anywhere other than with your employer match. Getting the employer match out of order could be extremely costly to your future retirement.

4. Not covering your largest deductible.

The Financial Order of Operations begins with having your largest deductible covered. This is the minimum required to begin to get your financial life on track. Without having your biggest risks covered, it’s impossible to properly build wealth. Covering your largest deductible means making sure an unexpected event will not derail your financial life. Catastrophic events come in all shapes and sizes, and they could happen to your home, health, car, or more. Insurance will normally partially, but not completely, protect you against those losses. It’s important that you can make up the difference and keep your finances on track.

In our latest show, we give real world examples of how not following the Financial Order of Operations can go wrong. In addition to the show, available below, make sure to download our free Financial Order of Operations resource. Our Financial Order of Operations course is now available for pre-order and launches October 1st. The course includes 12 video lessons with Brian and Bo, easy-to-understand worksheets that walk you through each step, and access to a private Facebook group and private live streams with Brian and Bo, available only to course participants.

Congress created what we know today as 401(k) plans by adding a provision to the Revenue Act of 1978 which allowed employees to avoid taxation on deferred compensation. The plans didn’t begin to take off until 1981, when the IRS started allowing employees to fund plans through payroll deductions. The rise in popularity of 401(k) plans inevitably led to the downfall of the traditional defined benefit pension plan; companies are fans of 401(k) plans because they are cheaper and more predictable to fund than traditional pension plans. In 1981, there were nearly twice as many traditional defined benefit plans than defined contribution plans for plans with more than 100 participants. In 2017, there were over 10x as many defined contribution plans as there were traditional defined benefit plans for large employers.

The explosion of defined contribution plans means that more employees than ever have access to employer-sponsored tax-advantaged retirement savings vehicles. Many Americans that don’t come from money are able to become millionaires through their retirement plans. The National Study of Millionaires found that 8 out of 10 millionaires invested in their company’s 401(k), and most reached millionaire status at age 49.

How do 401(k)s work?

If you aren’t familiar with how 401(k) plans function they can be a little confusing, but they aren’t difficult to understand. You, the employee, can put money in, and it grows either tax-free (if you have a Roth option) or tax-deferred. With a Roth component, you will pay tax on the front-end, and qualified distributions are completely tax-free. Tax-deferred means that contributions go in pre-tax, and ordinary income taxes are paid at the time of distribution.

There are a few things you need to know about your own 401(k) plan. Make sure you know how much you need to contribute to get your employer match. Some employers match dollar-for-dollar up to a certain percentage of your salary, and some match $0.50 on the dollar, or even $0.25. In some plans, your employer may make a set contribution regardless of whether or not you make your own contributions. Your vesting schedule is also very important. If you leave your employer before a certain period of time, you may lose all or some of your employer contributions (your own contributions are always 100% vested, and you cannot lose them). There are several different vesting schedules, such as cliff vesting, where everything vests at once, and graded vesting, where employer contributions vest in increments. After you know the basics about retirement plans, it’s time to start maximizing your 401(k).

1. Get the employer match.

It might seem like common sense to always take advantage of your employer match, but 35% of employees don’t contribute enough to get the full match. Make sure you know how much of your salary your employer will match, and contribute enough to your 401(k) to get the free employer match. It’s difficult to beat a 100% or 50% return on your money that your employer could offer you.

2. Choose appropriate investments.

Not all 401(k) plans are created equal, and some have more attractive investment options than others. When choosing investments in your 401(k), you may want to look for low-cost index investments such as target-date funds. If your employer doesn’t offer any low-cost investment options, it never hurts to ask them to consider expanding your options; previous employees may have never asked, and it might not be difficult for your employer to add more investment options to your 401(k).

3. Max-out your 401(k).

At a certain point, after you’ve gotten the employer match and maxed out your IRA and HSA, you may then look to max-out your 401(k) plan. Employees can contribute up to $19,500 to their 401(k)s in 2020, and an additional $6,500 if they are age 50 or older. 401(k)s are one of the best ways to save tax-advantaged money for retirement, and eventually you may want to take full advantage of your 401(k).

Our latest episode is all about 401(k) plans. Learn more about how they came to be, how to use and make the most of your 401(k), and even some advanced planning strategies to stretch your dollars even further. Watch our latest show, “Are You Using Your 401(k) the WRONG Way?”, on YouTube below.

Some financial mistakes are more harmful than others. It’s extremely important to get the big stuff right. Not only do you build a solid foundation, you also create a margin for error so that smaller “mistakes” don’t hurt as much. For example, if you get the big things right, like steering clear of high-interest debt and save 20% to 25% of your income for retirement, you have margin to visit Starbucks as many times as you like, or go out to eat more often than someone who isn’t saving and has high-interest debt. We think there are three major money mistakes you need to avoid at all costs to build a solid financial foundation.

1. Not getting free money.

35% of employees don’t even contribute enough to their employer-sponsored retirement plan to get the full employer match. If you are doing nothing else right in your financial life, make sure to at least take advantage of free money. It’s not just your employer that may offer free money, either; you can almost always find deals when you’re shopping if you know where to look. With online shopping, browser plugins can automatically add promo codes to your order, and there are tools to compare the price history of different items to make sure you’re getting a good deal. Credit card companies often offer free money in the form of cashback rewards, but to take advantage of this free money, you need to make sure to never carry a balance.

2. Carrying too much debt.

Not all debt is created equal; some debt, like credit card debt, should be avoided in any amount. Car debt can be tolerated in reasonable amounts for a short period of time, but can create issues if you take on more than you can handle. Mortgage debt can be tolerated for longer periods of time, but carrying debt into retirement or buying more house than you can afford can still be extremely harmful. We’ve created a few Money Guy Rules for debt to help you steer clear of potential trouble spots.

Credit card debt should be avoided at all costs since interest rates are punitive. If you are already in credit card debt, it is more advantageous, mathematically, to pay down the highest interest rate debt first. However, if you need a psychological boost to get out of debt, you may want to consider paying off the smallest balances first. Auto debt can be very dangerous even though interest rates are typically lower; cars are depreciating assets, so you could end up underwater on your auto loan. To avoid this, follow our 20/3/8 rule: put 20% down, pay your car off in 3 years, and make sure your payment is no more than 8% of your gross income. With mortgage debt, it makes sense to be debt-free by retirement. Total housing expenses should be restricted to 25% of your gross income or less.

3. Speculative investing

Investing trends are hard to keep up with because they come and go so quickly, but they all share a common theme: speculative investing trends promise higher returns than the market. We are naturally prone to believing we can beat the market. 65% of us think we’re smarter than the average person (if you are smarter than the average person, you might realize that’s impossible). Yet the data consistently shows that even professional investment managers fail to beat the market the majority of the time. We always think we’re the exception to the rule; even though passive investments have an extensive history of beating active management, trendy investments that promise astronomical returns always seem to be popular.

Recognize your own overconfidence bias and try to learn more about what you don’t know. When in doubt, defer to credentialed, fiduciary professionals you can trust that have been there before. It might not be a great idea to take investment advice from friends, family, or even some bad financial advisors.

On our latest show, we go more in-depth about the most important financial mistakes to avoid, and how they can hurt your Army of Dollar Bills. Watch our most recent episode, “3 Ways You Are Ruining Your Financial Life!” on YouTube below.

Although states are reopening and economies are up and running again, many Americans may still be suffering financially from the shutdown. We think there are a few things you can do to free-up some extra cash in the budget (or max out your Roth IRA), whether or not you lost your job or have been financially impacted from coronavirus. Some of this “found money” requires almost no work, and some of it requires a few hours a week. Here’s a few ways you can put extra money in your wallet or retirement account to help solidify your financial future.

Switch to high-yield savings

If your savings account is with a traditional brick-and-mortar bank, you might be missing out on hundreds of dollars of interest every year. The national average savings account interest rate is just 0.09%. Meanwhile, high-interest savings accounts are around 1.25% or higher. For a couple with an emergency fund of $30,000, they could earn an extra $348 every year by switching from an average savings account to a high-interest savings account. If you’re hesitant to switch from your local bank to an online-only bank, you can always keep an account open with your local bank and simply transfer money into your online savings account.

Get your employer match

If you watch our show, you hopefully already know how important getting your employer match is. Unfortunately not everyone watches the Money Guy Show, and every year workers with an employer match typically miss out on about $750 of free money. Our couple from above is missing out on about $1,500 in free money every year. Make sure you are getting your employer match and not leaving money on the table like most Americans.

Cut the cord

We don’t want you to sit in the dark every day, staring at the wall with nothing to do. There are cheaper options available for watching TV than paying for cable, though. The average American spends $90.57 per month on cable and $23.09 on TV or movie streaming services. If you cut the cord and switched to a live TV streaming service, you could expect to save about $40 per month compared to cable, or $480 per year. We realize that cutting the cord completely may not be realistic for everyone, but there are still ways to save money on TV and keep watching the programs you enjoy. If you’re paying too much for cable TV, there are many different live TV streaming services that could save you money.

Shop around for insurance

Have you shopped around for car insurance or homeowners insurance in the last several years? If you haven’t, you could be paying too much for your home and auto insurance. Nerdwallet found that the average driver could save $859 a year just by shopping around for car insurance. We think by shopping around for homeowners insurance as well, increasing your deductibles, and grouping your insurance, you could save $1,000 per year. Even if you think you have good rates, it doesn’t hurt to shop around and see what’s out there. Chances are you’ll save some money in the process.

Sell your unwanted stuff

One person’s trash truly is another person’s treasure. The next time you’re cleaning out the closet, you might want to sell some of your old stuff online instead of getting rid of it. Designer shoes and clothes, handbags, electronics, books, watches, and more can be sold online for cash. There are some websites that buy items directly from you and then resell it; this method won’t be as profitable as selling your own stuff, but it is less work. There are dozens, if not hundreds, of different websites you can use to sell your stuff. Some help facilitate local sales and others will require items to be shipped to your buyer.

By cleaning out your home and selling unwanted things or items that aren’t being used, we think you could easily make $1,000 or more. Old cell phones, computers, unused gift cards, and designer fashion items are among the most valuable items you can sell online. 

Join the gig economy

Nowadays, anyone with an internet connection or a car can work whenever they want to make extra money on the side. Picking up a side hustle could become lucrative, but even if you only work a few hours a week you could earn around $200 per month (the average income from side hustles is $1,122 a month, but the median income is around $200).

There’s a place in the gig economy for you no matter what you enjoy doing. If you enjoy driving and don’t want to interact with people very much, you can deliver groceries or food. (If you love driving and people, you can drive for a ride sharing company). Creatives can earn extra money by posting their work online and getting paid by the view. Freelancers can do just about anything for employers that need tasks done but don’t want to hire a new employee. If you’re an educator at heart, you can teach or tutor kids online. There are sites that allow you to do just about anything, like fixing toilets, mowing lawns, or moving furniture.

In total, we think you could earn an extra $6,728 in found money per year. That’s enough money to max out a Roth IRA and have some left over! Even if you don’t do everything we listed, doing one or two could still result in thousands of dollars in found money each year and that could turn into hundreds of thousands of dollars by retirement. Our latest show is all about how to find this easy money; watch it now on YouTube below.