Like many people, I'm terrible at investing. I've lost more $$ in the market, from unexercised stock options and bad decisions than I really want to think about. To put this in context, I could be living completely debt free (yep, no house payment). Unfortunately, when it comes to money, it's not my expertise.
So I have a mixed relationship with my 401K, which is self-directed. "Self-directed", to me, is the kiss of death. One look at my trends the last few years, and sure enough, I suck at this.
(If you know of any good services that help, send me the info, I'll post it here.)
However, I do know some things, and will present the ones I believe to be great ideas. They're pretty self-evident, so I doubt anyone will contradict what follows.
401K Loans
Before we get started, let's talk about 401K loans. You take out a loan and you pay yourself back, say 9%. Wow, you're paying yourself, minus a small 1-time origination fee. Score! right?
It's not that simple. Remember that you're paying yourself back with AFTER-TAX money. When you withdraw the loaned amount during retirement, you'll have paid taxes on the amount TWICE (once at your current tax rate, and once at your retirement tax rate). Factor that in before deciding that "paying yourself instead of the bank" is a good idea. You'll almost always find that paying the bank will be a better option than taking a 401K loan.
Guidelines
I presume we all know what a 401K is and why we need to at least contribute to the max our employer will match.
Guideline #1 - If your employer has a match, take full advantage of it. No other investment offers such an incredible rate of return, guaranteed.
e.g. My current employer matches 75% of what I put in my 401K, up to 6%. They don't match any funds I put in over 6%
(If I contribute 8%, my employer will only match for the first 6%)
This means my employer will put in 75% of whatever 6% of my salary is, if I choose to invest 6% in my 401K.
As you can clearly see, I would just be throwing away money if I didn't take advantage of this phenomenal feature. Below are round #s to make the match simple.
If I put in $100, they will add another $75.
if 6% is $600, I would be silly to only put in $100 (1%)
Guideline #2 - Before taking that cool job in another company, consider the amount of your 401K you may not be vested in. You could be walking away from a lot of $$.
Guideline #3 - When you leave a company, keeping your 401K with the 401K company may NOT be to your advantage!! The guideline: Check around.
If you can control yourself (!), rolling it to an IRA may be a better option, eliminating up to 1.2% in yearly fees. Doesn't sound like a lot, does it?
Consider: If you're 40 and have $120,000, eliminating those fees will mean you have about $100,000 MORE at 65!! 1.2% sounds pretty good now, doesn't it?
How good is your 401K compared to others?