For those who want to prepare for the future, a retirement fund is usually necessary so that one can have some form of safety net that can generate even some small passive income. For most countries, this retirement fund is known as the 401k and is a kind of account wherein employers cut out a part of the employees salary and deposits it as contribution. While the entity handling the fund usually grows the money for the employee, it is also important to know how to invest in your 401k wisely to really take advantage of the fund.
The first tip for the younger people would be to start as early as possible. While it is okay if there are people who start as late as 40 or 50, it is definitely recommended that one start as early as can be. Since the model of this fund is based on compound interest, the longer the time period, the bigger the compounded earnings get.
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.
In order to further explain how this works, an example will be given. If one has five thousand dollar account with a 3 percent interest rate, he or she will receive five thousand one hundred fifty net amount for the month. During the next month, his or her interest income will then become 3 percent times five thousand one hundred fifty instead of just 3 percent times five thousand.
As one can observe compounding fully accumulates the amount of money every month. However, before one can have compounded interest, one must first know how much to contribute so that he or she can have adequate savings but still enough to pay for bills. A good percentage would be something like ten to fifteen percent contribution out of the monthly salary.
Now, the next thing to think about would be the retirement fund. One actually has the liberty to choose which of the mediums he or she would want inside his or her mutual fund. In order to have a properly diversified portfolio, one must have a lot of different mediums in the fund that contribute to the total fund.
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.
For those who want to really maximize the benefits of this retirement fund, here are some tips. It is always best to have knowledge in financial planning in order to really know how to handle money. With these tips, one will know how to properly handle a 401k account.
The first tip for the younger people would be to start as early as possible. While it is okay if there are people who start as late as 40 or 50, it is definitely recommended that one start as early as can be. Since the model of this fund is based on compound interest, the longer the time period, the bigger the compounded earnings get.
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.
In order to further explain how this works, an example will be given. If one has five thousand dollar account with a 3 percent interest rate, he or she will receive five thousand one hundred fifty net amount for the month. During the next month, his or her interest income will then become 3 percent times five thousand one hundred fifty instead of just 3 percent times five thousand.
As one can observe compounding fully accumulates the amount of money every month. However, before one can have compounded interest, one must first know how much to contribute so that he or she can have adequate savings but still enough to pay for bills. A good percentage would be something like ten to fifteen percent contribution out of the monthly salary.
Now, the next thing to think about would be the retirement fund. One actually has the liberty to choose which of the mediums he or she would want inside his or her mutual fund. In order to have a properly diversified portfolio, one must have a lot of different mediums in the fund that contribute to the total fund.
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.
For those who want to really maximize the benefits of this retirement fund, here are some tips. It is always best to have knowledge in financial planning in order to really know how to handle money. With these tips, one will know how to properly handle a 401k account.
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