Take The Match...No Matter What?

Don wants to know if you should always invest enough to reach the company's 401(k) match, no matter what. Dave says no and tells Don why.

QUESTION: Don on Twitter wants to know if you should always invest enough to reach the company's 401(k) match, no matter what. Dave says no and tells Don why.

ANSWER: No. You shouldn't always no matter what. As a matter of fact, while you're getting out of debt and paying off everything but the house, then you are stopping your investing completely regardless of the match. Now if you're going to goof around with your get-out-of-debt plan, then that's not what I'm talking about. But if you're going to be very focused and very intense and you're going to knock the debt out as fast as you can, then you stop the investing temporarily regardless of if you have a match or not.

The other time you wouldn't want to do a 401(k) even if there's a match is if the investment options are absolutely horrible. Most times, I don't find that to be true. Most times, I find that investment options are fine and what you're looking to do with your 401(k) is spread your investments across four types of mutual funds: growth, growth and income, aggressive growth, and international. You're looking for mutual funds that have a five- to 10-year or more track record. But if you look at your particular group of funds and they're all just absolutely abysmal, and I have looked at a few HR kits a time or two and they're just horrible. Almost always, that's not true, though. You do want to take the match.

After I do the match, then I'm going to stop and do Roth IRAs before I do any non-matching 401(k) if you qualify for a Roth. If you have a 401(k) available to you, here's your rule of thumb. The first money you should put in is matching up to the match if your options are at least decent. The next money you should put in is Roth IRAs in those same types of growth stock mutual funds. If you max out your match, max out the Roth IRAs, and you're still not at 15% of your income, then you'll go back to the 401(k) and do some more non-matching there. If you max out the 401(k) and you max out the Roth and you're still not at 15% of your income, you're barely qualifying for a Roth at that point. You're almost making too much. That's your formula for investing. If you don't have a 401(k) or you don't have a match, you just start with a Roth IRA. If $10,000 and married filing jointly doesn't take you to 15% of your income, which means you're making upwards of $85,000 a year, then you would go back and do some non-matching 401(k).

When you reach the 15% mark, we stop adding above that, and we can go on to Baby Step 5 and put money in the kids' college and Baby Step 6 to start paying off the house early.