Saturday, September 16, 2000

HIGGINS: Personal finance

Join in 401(k) - it pays

        When you're in a crowd, look at the person to your right. Now look at the person to your left.

        National statistics say that one of those two people is playing the stock market. And there's a good chance that person is investing through a 401(k).

        Twenty years ago, only one in five people held stock, either directly or through mutual funds. Much of that 86 percent increase in equity ownership is because of more employers offering 401(k)s, more stock choices in those plans and more people investing in them.

        Take a better look at that investor next to you.

        According to an Investment Company Institute survey, the typical stockholder or mutual fund owner is:

        • 47 years old with a household income of $60,000 and financial assets of $85,000.

        • Married, employed and a college graduate.

        • A Southerner or Midwesterner (33 percent of equity owners live in the South; 26 percent in the Midwest; 25 percent in the West; 16 percent in the Northeast).

        But another ICI survey showed the typical 401(k) investor is a little different than the larger group. A 401(k) participant is:

        • 41 years old with a household income of $50,000 and financial assets of $45,000.

        • Has only a basic understanding of investing.

        • Has no other investments other than a savings account.

        With millions holding $1.5 trillion in their 401(k) accounts, there just might be something to starting your portfolio with a 401(k).

        “But I can't afford the paycheck deduction,” you say.

        It might not be that hard to come up with a few dollars a week. Plus, with tax savings and employer matches, how can you not afford it?

        Skip a dinner out or other luxury. Such budgeting can free up $24 a week.

        But you'll see a much bigger benefit than just having that $24 for later. First, you get a tax savings. A federal income rate of 28 percent (not counting FICA, state and local taxes) means $6 a week in your pocket instead of the government's.

        Then, you'll likely get your employer match. This is money your employer is just giving away.

        ICI says a typical employer match is 50 cents up to 4 percent of your salary that you save. In other words, it maxes out at 2 percent of your salary. Who would turn down an extra 2 percent bonus? If the $24 is 4 percent, you can get $12 handed to you each week.

It's worth it
        Still not worth it for a lousy $12? But it's not just any $12. It grows over time — $12 today, allowed to compound at 10 percent every year, turns into $209 in 30 years. One year of that match ($624) turns into $10,888 in 30 years.

        And that's not including what your savings compounds into. Start today, skip the pizza and get the bonus. With $36 a week gaining 10 percent interest, you'll have $356,199 after 30 years. You'll have almost $1 million in 40 years.

        That's some real bang for your 24 weekly bucks.

        Amy Higgins writes about personal finance for the Enquirer. You can reach her at 768-8373;; or Your Money, The Cincinnati Enquirer, 312 Elm St., Cincinnati 45202.


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