Monday, July 27, 2009

Don't Save Money in your 401(k)

Okay, now that I have your attention. Please disregard this title. I found an article in a highly circulated newspaper (I will NOT say which one) that sported this sort of a title and I immediately read the article to find out what financial nincompoop (I'm sorry, I can't be kind on this one) would actually advise in this economy NOT to save. Well, after you read the article you find out that the advice is sound if you have a 401(k) that is in certain types of fund, with lower than average rates managed by certain individuals. All-in-all less than 1% of Americans would have benefited from this advice.

I was on the phone that very afternoon with one of my fellow financial writers and I was venting about this particular article. In the middle of full rant, Liz stops me and says, "Janine! These are the types of titles that get eyeballs, okay?!" Oh. Right. Sigh. Yes, I know. These are the sorts of catchy-in-your-face types of headlines that will attempt to induce folks to read.

However, what I have found in my clients is that most of them don't read the full article to see if the advice applies to them and they end up calling me and telling me how they have pulled money from their long-term savings vehicles and what gold mine should they invest in. (Truth! I lie to you not on this one. Actual phone call!)

My advice to you, frugal friend, is this. Read the articles. See if this advice really applies to your personal situation. Whatever you do, don't invest in gold mines or other such high-risk ventures unless you have money you don't mind losing. Sure you could hit it big, but you could lose it all too. You know what my grandpa used to call high-risk investmenting? Gambling. Don't gamble (a.k.a. high risk investing) until you have:

  • 3-6 months of income saved

  • IRA or 401(k) is maxed out

  • 529 plans for kids' educations maxed out

That way if you lose all of your investment that is high risk you don't lose the house too. Make sense? Personally, I wouldn't advise ever going the high-risk investing route. I'm too conservative for that. My husband and I work way, way too hard for our money to gamble it. However, if that is your thing...go ahead, just be smart about it. End of lecture. I'll get off my soap box now. Thank you for listening.


Nikita B said...

Hello, Janine!
I've been studying a lot about finances lately and my young husband and I are planning on becomming financially independent in as short a time as possible. (We have no debt, and we don't plan on having any. We apply the 60/40 rule to all of our income and our savings are growing fast! We're going to get there!) I was wondering what kinds of investments, long-term or otherwise, do you see as being most helpful and effective in helping a person be able to leave paid employment and live off their investments? How were you and your family able to achieve financial independence? I have read about a lot of theories and practices and I am working on putting the best plan together for our family.
Thanks very much. The principles I have heard you speak about many times have greatly influenced my financial life for the good!

Nikita B. said...

Great advice. A lot of information applies to the general public and not individual circumstances. Use caution when investing. Using tax deferred investments are a great way to build wealth fast. Find out more at
Fern Alix LaRocca CFP® EA