Of course being in the habit of saving is always important. But where we choose to save is even more important.
The whole push for average consumers to jump on the 401(k) bandwagon (where they do not control the investment process and have trouble even controlling their spending let alone playing complex financial games on the stock market) is questionable in my book. Of course if an employer offers matching funds, then taking advantage of a 401(k) benefit at work probably makes sense.
But if employers stop matching those funds, continuing to save through a 401(k) is not necessarily the smartest. Yes, save, but save through a 401(k)? Not necessarily.
Here’s a few things to consider:
1. 401(k) “investors” are not true investors who can control what happens to their money. A true investor is one who controls the process of investment and can learn from his experience. 401(k) contributors are at the mercy of the market and the fund managers, directors, and others who make decisions about what will happen to their money. Given all the other options for learning how to make a return on investment, i.e. real estate, owning your own business, etc., 401(k) “investing” without an employer match is one of the least attractive ways to save for the future.
2. If the 401(k) saver is in debt, it’s likely that his guaranteed debt interest is going to far out-weigh anything he may make in his non-guaranteed 401(k). Before throwing money at a 401(k) that an employer is no longer matching, why not put that money towards consumer debt, such as credit card balances? This kind of debt is dangerous, especially in today’s market, where credit card companies are nervous and touchy. They can raise rates, increase minimum payments, lower limits and a whole slough of things that could put some people over the edge. Getting out of this kind of debt first will help save thousands of dollars in interest that can then be put into retirement savings.
If you’re in debt and not getting an employer match on your 401(k) you’re usually paying far more in debt interest than you will earn for your retirement squirreling money away in a lower-return 401(k).