Up, up, and away!

My nephew just got his pilot license and was hired at a major airline. Congratulations!!
(got engaged too... congrats to you both!)

I, of course, am going to turn this into a lesson. :-)

You have joined a profession that, from my limited Googling, appears to have a decent starting salary and that can easily turn into an extremely well-paying career, six to ten years down the road. I'll whip out the old cliche though -- it ain't how much you make, it's how much you keep.

Most companies are turning away from pension-type plans, and opting into defined contributions plans -- or 401(k)s. If yours offers one, please, *please*, just fill out the paperwork to start contributing 10% as soon as they let you!

Now, 10% is a pretty large chunk of change for someone to voluntarily give up. You have probably already estimated your paycheck and have spent it all mentally already. Don't!!

First, the good news. 401(k) contributions don't count towards earned income, and so you'll pay less taxes than you otherwise would. If you make $30,000 and contribute $3,000, then you only get taxed on $27,000 of income (heh -- read an earlier post and you'll see I'd love for you to also contribute $5,000 to a Roth IRA).

Next, the really good news. Employers typically will also contribute some money for you too, based on what you put in. Let's say it is 50% of your contributions, up to your 10%. So -- you put in 10%, they put in 5%, so you've added $3,000 to your retirement, they've added $1,500, and you've lowered your taxes.

Finally, the best news. As your investments grow, they do not get taxed while in this account. That is called tax deferred compounding, and it's a beautiful thing. Sure, in 30 years if you retire and take some out, that gets taxed -- but 100% of it gets to compound in the meantime, year after year.

Downside? You might only go to Starbucks once a week instead of every day. Upside? How does retiring at age 50 - 55 grab you? If you contribute 10% from day one, you'll be in a position to retire early!

Next week: what funds to invest in for a rookie. :-)

Regards,
Trond