In honor of Financial Literacy Month, we will be discussing a series of topics to equip you with the tools to develop healthy financial habits, understand your financial position, and identify goals to work toward. Part four will focus on how to save for your retirement and use compounding to help you achieve a more prosperous retirement.

Developing Saving Habits Using the 401k Account

It is never too early to begin saving for retirement. It may seem far away but planning for it early is a great opportunity to develop healthy saving habits. Most employers offer employees access to tax-deferred 401k accounts, which allow the investor to take a tax deduction on contributions to the plan and grow them tax-deferred. 401(k) plans allow employees to select a percentage of their pre-tax income to contribute, which is automatically deducted from their paycheck. This “set it and forget it” approach can do wonders for your net worth over a long-time horizon. Another great feature is that many employers offer to match their employee contributions up to a certain amount. Everyone should strive to save enough of their salary to qualify for the full employer match since it’s the closest thing to a “free lunch” out there. If you are unsure of whether this is offered, it is worth asking HR.

Just in the 21^st century, we have seen market agitating events like the Dot-Com Bubble Burst, 9/11, U.S. invasion of Iraq and Afghanistan, the Global Financial Crisis, the Covid-19 Pandemic, and now the war in Ukraine. Over this time period, the S&P 500 (U.S. Large Cap Equity Index) has had 8 unique drawdowns of 10% or greater, including a maximum drawdown of 55.3%, yet has delivered a total annualized return of 7.1%. Every year presents dozens of reasons to sell, as illustrated below. It might seem like it is a good time to de-risk, take some money off the table, ignore your long-term plan, and wait for calmer times. Who could blame you? Sticking to your plan and keeping a long-term view by staying invested is hard, especially when the market is dropping. After each subsequent drop, the decision not to change your investment strategy might seem increasingly regrettable. Everything appears obvious in hindsight.

In honor of Financial Literacy Month, we will be discussing a series of topics to help equip you with the tools needed to develop healthy financial habits, understand your financial position, and identify goals to work toward. Part Two will focus on helping you understand your net worth and using that to create long-term financial goals.

Why Net Worth Matters

Your finances are holistic and affect many aspects of your life. Your net worth is used in determining proper insurance coverage, creditworthiness, and as an overall barometer of your financial health. Understanding it can help you set long-term goals to maximize your financial freedom and minimize future financial worry.