This is the third article in my series, Conserving Money, designed to impart my learnings about saving and financial planning to my children. In this installment, I explore employer benefits you should definitely be using.
Employers provide you money to participate in their workplace savings accounts. It’s a benefit and they want you involved!
Your employer benefits are an important element in saving and conserving money for future use. Your company may have benefit options which allow you to purchase services at a discount and opportunities for saving and investing. There are two, potential savings vehicles that employers will actually match your money if you save a small amount out of your paycheck. Let’s take a look at these two options.
401k Accounts
A majority of employers offer 401k plans for their employees. There are a number of benefits of investing a portion of your income into one of these plans, including:
- Deductions are made prior to federal taxation, therefore reducing the overall amount of tax paid to the government.
- Gains and earnings made prior to distribution are not taxed
- Most employers match a portion of what you contribute
The average company matches the first 3.5% of what the employee contributes to the 401k. For an average employer, they will match the amount you contribute up to 3.5%. That’s money you receive for just participating in the program. It is equivalent to receiving a 3.5% raise.
401k Benefits
Let’s take a look at an example of how this works. If you make $500 per week and have 20% deducted to cover federal tax, your take home pay will be $400. If you begin to contribute 5% of your salary to a 401k with a 3.5% match, here is how this becomes better for you
- Your 5% deduction = $25
- Employer match of 3.5% = $17.50
- Total contributions to 401k = $42.50
- You are now taxed 20% on $475 for a deduction of $95.
- Take home = $380 income + $42.50 = $422.50
Your total wealth increases weekly by 5.6% from $400 to $422.50!
As you can see, the benefits of participating are enticing for all income levels. Unfortunately, 20% of people eligible for a 401k plan don’t participate. Even if you only take advantage of the match, you are making a wise decision for your future. If you invest beyond the match, there are even more benefits for retirement and wealth accumulation. Check this article and others out to understand all of the benefits.
Employee Stock Purchase Plans
Stock purchase plans are typically a benefit of working for a publicly traded company listed on a stock exchange. There are many varieties of these plans but they all have this in common: The company is offering advantages to its employees to purchase the company’s stock. Let’s explore why a company wants its employees to own stock and why they would make acquiring stock advantageous for their employees.
First, you buy things you like, right? The same applies here. If you buy the stock, you feel more positive about the company and you will watch its stock, hoping it appreciates in value. Second, when you are an owner, you naturally work harder to keep it moving in the best direction possible. You take care of it better. Third, when you own something you like, you tell your friends and family all about it. You provide terrific word of mouth and the company hopes you will be a key marketer for their product or service.
Be a Stock Owner!
Now that you realize all of the reasons your company wants you to own its stock, what’s in it for you? Plenty. Many of these plans allow you to buy the stock at a discount or with matching money from the company. In addition, you will not need to pay commissions. Finally, buying stock through the company allows you to accumulate shares over time using a process called dollar cost averaging. This technique allows you to spread your purchases over time versus buying the stock all at one time. If you think your company future prospects are positive, this is the best method to buy shares over time.
Employer Savings
Businesses want to incentivize their employees to stay and to work hard to make the company the best. Part of attracting and retaining the best employees is by offering competitive benefits packages. Take a look through all of your benefit information to learn what your company is doing to help you conserve money and build wealth for your future. You may find options like these listed here and maybe even others. Take advantage of these programs to enhance your ability to become financially independent.
As I discussed in Start Saving with a Rainy Day Fund, another helpful tool is increasing your savings when you get a raise or a bonus. This tool is especially advantageous if you are having your money matched. In these cases, you will save $2 for every extra dollar you set aside. If your employer offers a 401k and/or an ESPP savings vehicle, you should set a goal to set aside 10% of your income into these plans. It’s time to get started and start taking advantage of these employer benefit programs!
**Employees of other companies may be eligible for other plans, like a 403b, to help with saving for later in life and retirement. Check out this article or talk with your benefits office for details on how to enroll and participate in these plans.