Few things still make me shake my head. But after almost 19 years as a financial advisor, I still find it mind-boggling that people don’t jump at the chance to join their company contribution plans. These are plans where they’ll receive free money for doing so!
You may be wondering why I am bothering to write a post to argue the importance of signing up for these plans when, by doing so, I’m reducing the amount of contributions clients would be investing with me. The answer is this: Because you almost never hear anyone talking about it, and it can make a huge difference for you and your family’s lives if you do this for the rest of your career.
When it comes down to it, there really is no excuse for neglecting your company’s plans. Well, unless you are so wealthy that the free money is negligible to your net worth. However, ironically, most wealthy people would take advantage of it out of principle, which is why many of them are wealthy, but that is a conversation for another day....
“I have to pay off my credit card debt first.”
One of the more plausible excuses I hear come from people who prioritize paying off their credit card debt. Although this is a usually a prudent plan, let’s take a closer look. Let’s say you have $10,000 annually that you can either put towards your credit card or invest in a company plan. If the interest rate on your credit card is 25%, you save $2,500 in interest payments per year by paying it down. In this case, you reduce debt by $10,000 and save $2,500 in interest for a net improvement of $12,500. This isn’t too bad.
But there’s an alternative. You can use the $10,000 to invest in your company plan, which, although the percentages can vary, will generally contribute at least 50 cents for every dollar you invest. As a result, your company adds $5,000 to the $10,000 you invested for a total of $15,000.
Assuming the $15,000 will grow in value with a conservative growth rate of 5% per year, this adds another $500 per year. In total, the $10,000 investment would yield a $5,500 return compared to the $2,500 savings on the credit card.
This is what we in the investment business call a no-brainer.
Even if there’s a year where the investment doesn’t grow or falls 10%, it still makes sense. What’s even more mind-boggling is that many of the plans people have access to match dollar-for-dollar as opposed to the 50% example given here.
“I don’t like the investments I have to choose from.”
Other people have held off joining their company plans because they don’t like the investment choices or they don’t think their company stock will do very well. However, if someone is willing to give you a guaranteed 50-100% return on the start of your investment, your margin for error is so big almost any investment will do. On the other hand, if you think your company stock is so bad to negate the free money you’re getting, then you might want to start looking for a new job.
Things to consider
When you do participate in your company plan, consider how it fits into the asset allocation for your overall investment portfolio. After a certain amount of years, you may end up with a rather large sum in that one company, so make sure you protect yourself from this happening. For stock purchase plans, there’s usually a “vesting” period in which you must hold the stock. After the period is over, usually after one or two years, you’re free to sell off your shares and diversify your investments.
For those of you already taking advantage of your company plans, congratulations! Secondly, I have a favour to ask. Pass this blog on to someone who needs to read it or just encourage your friends, family, and co-workers to sign up for their plans too.
For those of you still skeptical or sitting on the fence, feel free to send me an email and I’ll crunch the numbers for you. The results will likely shock you!
Most people I know are always wishing they made more money. Well, by participating in these plans, you’re indirectly accepting that raise!