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A retirement fund is extremely important for any employee because it allows them to have a steady stream of passive income as well as some savings just for a rainy day. This retirement fund is also known as a 401k and is a type of savings account that employers would provide for their employees in order to help their money grow. To further supplement this income, it is also good to learn how to how to invest in your 401k wisely to fully maximize its benefits.
Now, the most obvious tip on how to effectively make money grow through this fund would be to start off very early. While there is no exact age wherein one should start this fund, it is definitely recommended to start as early as possible in order to take advantage of compound interest. When one gets his or her first job, apply for this fund immediately.
For those who do not know much about what compound interest is, here is a little background. In a nutshell, compound interest is monthly interest earned of the net amount of the investment fund. This means that after one has earned interest this month, he or she will earn interest next month based on the interest and principal of this month.
It might be a bit complicated to understand so here is an example. If one puts in five thousand dollars in a mutual fund with three percent interest, he or she will earn one fifty dollars interest income. During the next month, he or she will then earn interest based on the principal amount, which is five thousand, and the interest of the current month which is one hundred and fifty.
Now that one knows how it works, the next thing to do is choose the savings rate that is most suitable. The key here is to not contribute too much nor contribute too little. An ideal amount would be something like ten to fifteen percent of the monthly salary so that one would have enough for bills.
Another thing that one would have to consider is which investment mediums to put money in. With mutual funds, one can choose where his or her money goes to and the fund manager will be the one to monitor the money. Of course, the specific mediums that one will choose will all depend on his or her personal preference and risk tolerance.
A mutual fund would usually have a standard collection of index funds, small stock funds, bonds, time deposit, and foreign stocks. One can choose the percentage of each of these mediums. A good, medium risk percentage would be forty percent index fund, fifteen percent foreign stocks, thirty percent bonds, ten percent small stocks, and point five percent money markets.
These are some things to take note of when investing in your 401k money. Always remember that financial literacy can help one be able to fully utilize the capacities of the retirement fund. That way, one will know exactly how much money he or she will make in passive income.
Now, the most obvious tip on how to effectively make money grow through this fund would be to start off very early. While there is no exact age wherein one should start this fund, it is definitely recommended to start as early as possible in order to take advantage of compound interest. When one gets his or her first job, apply for this fund immediately.
For those who do not know much about what compound interest is, here is a little background. In a nutshell, compound interest is monthly interest earned of the net amount of the investment fund. This means that after one has earned interest this month, he or she will earn interest next month based on the interest and principal of this month.
It might be a bit complicated to understand so here is an example. If one puts in five thousand dollars in a mutual fund with three percent interest, he or she will earn one fifty dollars interest income. During the next month, he or she will then earn interest based on the principal amount, which is five thousand, and the interest of the current month which is one hundred and fifty.
Now that one knows how it works, the next thing to do is choose the savings rate that is most suitable. The key here is to not contribute too much nor contribute too little. An ideal amount would be something like ten to fifteen percent of the monthly salary so that one would have enough for bills.
Another thing that one would have to consider is which investment mediums to put money in. With mutual funds, one can choose where his or her money goes to and the fund manager will be the one to monitor the money. Of course, the specific mediums that one will choose will all depend on his or her personal preference and risk tolerance.
A mutual fund would usually have a standard collection of index funds, small stock funds, bonds, time deposit, and foreign stocks. One can choose the percentage of each of these mediums. A good, medium risk percentage would be forty percent index fund, fifteen percent foreign stocks, thirty percent bonds, ten percent small stocks, and point five percent money markets.
These are some things to take note of when investing in your 401k money. Always remember that financial literacy can help one be able to fully utilize the capacities of the retirement fund. That way, one will know exactly how much money he or she will make in passive income.
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