Rivka asks: I’m 25 and switching jobs. My old company didn’t match 401(k) contributions, so I put 6% of my salary into a Roth IRA. My new company, however, matches 100% on the first 3% of my salary that I contribute to their 401(k) and 50% of the next 2%. Should I contribute 5% to my 401(k) and then a little more to the Roth IRA? Or should I just let me IRA sit for the time being and not contribute? What about a savings account? (I currently contribute $300 a month to a high yield savings account.)
Congrats on the new job and the great saving habits thus far! It sounds to me like you already have a solid saving plan figured out.
I would recommend doing exactly what you suggest—contribute 5 percent of your salary to your company’s 401(k) plan to take full advantage of their matching funds. Next, take any additional funds and put them into a Roth IRA (up to the $5,500/year maximum in 2016).
As for how much you sock away into a savings account, it depends on your existing savings and your goals for that money. The first step is to have a few months’ expenses saved in an emergency fund. If you’re still working on that, I would contribute as much as you can afford to the savings account until you have that cushion of between three and six months’ expenses.
Next, it’s onto long-term goals: 20 percent for a down payment on a home or the ability to pay cash for your next car or vacation, for example. Once you’re saving a solid amount for retirement every year, are out of debt, and have an emergency fund, it’s up to you how to spend or save your money. That is true financial independence!
Thanks for the great question, and best of luck! Do you have a money question you could use some help with? Send it to me and I’ll do my best to answer it in a week or two here!