If there is one thing you can do to make yourself rich and generate passive income for years and years to come, its saving for retirement little by little with every passing paycheck.
This is a lot easier to do than most people think. Almost every working American has an opportunity to do this through an employer sponsored retirement plan like a 401(k).
Started in the 1970’s, 401(k) plans have quickly became one of the most popular ways for the working class to save their money and build a small fortune. That small fortune is then used to create all of the money they will ever need to cover their expenses for the rest of their lives.
If you’re given the chance to contribute to your employer’s retirement plan, then you’ve got a golden opportunity to easily become a millionaire (as we’ll show you below). 401(k) plans offer you very unique advantages well above and beyond that of regular savings accounts. But your fortune will not appear on its own. You have to stay disciplined and make a commitment to start saving and continue to do so. Lots of people put off saving with a 401(k) because its optional. Make sure you don’t wait. The earlier you start taking advantage of one, the better off you’ll be.
The following are the reasons why an employer sponsored plan can be the ultimate solution in creating passive income above and beyond traditional means of saving your money.
Growing Fast with Compounding Returns
One of the magical components of using a 401(k) plan to save for retirement is the fact that you can capitalize on the power of compounding returns.
Compounding returns are when you make money off the money you’ve previously earned. This is a very exciting concept because it means your money can grow exponentially rather than in a straight line.
Take for example an employee who saves up $500 per month for the next 30 years. How much money will they have in 30 years?
$500 x 12 x 30 = $180,000, right?
At a compounded rate of 10%, they would have an account balance of $986,964! That’s almost a million dollars!
Want to be a millionaire even sooner? Suppose you save $18,000 every year for the next 20 years. Again, you might think it’s $18,000 x 20 = $360,000? But really at an investment return rate of 10% per year, your employer sponsored plan would have a balance of $1,030,950.
That’s the power of compounding returns. And everyone who saves their money for retirement with one gets an opportunity to use it!
Save Money on Taxes
Who would you rather give your money to: The government or yourself?
One of the great benefits of using an employer plan like a 401(k) (or any other type of company sponsored plan) is that it is tax-sheltered.
What does that mean? It means that you do not have to pay taxes on the money you earn (at least not right now).
How is that important? Let’s go back to our example above where you’re saving $500 per month in your 401(k). If you weren’t, they you’d have to pay taxes on that money. And assuming a 25% tax rate, you’d lose $125, leaving you with only $375 to save.
In other words, for every dollar you save, you’re effectively saving 33% more than if you had tried to save it after you received your pay check.
Now let’s take that concept to the extreme! At the maximum IRS 401(k) contribution limit of $18,000 for 2015, you’d effectively be saving yourself $4,500 in taxes! That’s a whole lot of extra money going back in your pocket simply for being smart about how you save.
Free Money – Getting Employer Contributions
Who doesn’t love free money!
One of the absolute best parts about a good employer sponsored retirement plan is when they offer something called employer matching. Employer matching is when the company you work for “matches” the amount of money you save.
Sometimes it’s dollar for dollar. Other times it might be less, such as 50 cents to a dollar. Every company’s 401(k) matching program is just a little different.
Why is that important? Because its without a doubt one of the easiest ways to earn money. All you have to do is save!
Let’s say your company matches the first 5% of your 401(k) savings dollar for dollar. That means for that $500 you saved above, you have the chance to earn yet another $500 from your company, and save a total of $1,000 every month! Now instead of saving up to one million dollars, you could potentially save all the way up to $2 million dollars! How great is that?
If you’ve got the chance to start saving for retirement with a 401(k) plan, I’d encourage you to strongly look into it. By saving using an employer sponsored retirement plan, you’ll take advantage of compounding returns, tax sheltering, and employer matching. Your participation could be a golden opportunity to build your fortune and create passive income for life.
Featured image courtesy of Flickr