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Priority 1: Free Money

The first priority of money is free money: free money is the money provided by your company when you participate in a company-sponsored retirement plan or a reduction in taxes for investing in specific education vehicles for your children and family. Free money is often provided through a matching plan, in which your company offers to match a percentage of the money you invest in your 401(k), Keogh (or small business retirement plan for sole proprietorships), or other retirement plan. A matching plan is used as an incentive to encourage employees to remain with the company and invest in a retirement plan. Some states also allow a tax deduction for your contribution to that state’s 529 Plans for education, which is, in essence, free money as well.

Free money is your first priority because it is free, and the percentage matched by the company is usually higher than any rate of return you could earn in the market. The risk of investing in a company-sponsored plan is that you are usually required to stay with the company for a certain number of years to become fully vested, or in other words, to take full ownership of the free money.

Examples of free money include company matching in a 401(k) or 403(b) plan, or even in a Roth 401(k) or Roth 403(b) plan, and the possible reduction in state taxes due to a contribution to your state’s 529 Plan.

 



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