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This post is part of A Simplified Roadmap to Financial Freedom. Discover the full guide and past steps in the Your Money category.

Side note: If you’re self-employed, we will cover additional options than what is mentioned here in the next step.

Why Your 401(k) Matters

Investing can feel intimidating at first. ETFs, index funds, mutual funds, stocks, bonds — there are so many paths it can get overwhelming. But here’s the good news: in this step, we’re keeping it simple. The goal isn’t to master every investment type right away — it’s to take action on the easiest, most effective starting point.

The great thing about investing is that you have choices, and you can build on them as you go.

Imagine this: you’ve built a safety net with your emergency fund and paid down your debt. You’re finally ready to start growing your money, not just protecting it. That’s where a 401(k) comes in.

A 401(k) is an employer-sponsored retirement plan. You can set up automatic payroll deductions so a portion of each paycheck goes straight into the account. Many employers also match part of your contribution — which is essentially free money for your future.

Before you begin, check your employer’s plan details: what funds are available, how the match works, and what your options are for contributing.

How to Contribute

Here’s how it usually works:

• Set your contribution percentage. Most people start around 5–10% and increase over time. For this plan, we’ll aim to start at 10% and work toward 15%.
• Get the employer match. Always contribute at least enough to capture the full match — it’s free money.
• Choose your investments. If you’re hands-on, you can select mutual funds, index funds, or target-date funds yourself.
• Hands-off option. Don’t want to manage it? Most 401(k)s offer automatic enrollment. You simply pick how aggressive or conservative you want to be, and the plan does the rest.

⚠️Caution: It’s important to know that investing can come with hidden fees. These fees might include administrative costs, fund management expenses, or even advisor charges that quietly eat away at your returns over time. The good news? There are ways to identify and minimize these costs so more of your money stays invested and working for you. We’ll dive deeper into spotting and reducing hidden fees in a later post.

We’ll also dig deeper into the different investment options but for now, keep it simple: get moving in the right direction and let your money start working.

Why Pre-Tax Contributions Matter

Contributing pre-tax dollars lowers your taxable income. That means you’re paying less in taxes today while saving for retirement tomorrow. And because of how payroll works, you usually don’t “feel” the full amount leaving your check.

IRS standard deduction (2025):

• Single filer: $15,750
• Married filing jointly: $31,500

This is income the IRS automatically doesn’t tax. Your 401(k) contributions reduce your taxable income even further.

Quick example:

• Salary: $65,750
• 10% contribution: $6,575
• For taxes, it’s like your income is now $59,175
• After the standard deduction, taxable income = $43,425
• You’ve saved $6,575 for retirement and lowered your tax bill today.

Double win.

Don’t Miss the Employer Match

Say your employer matches up to 5%.

• Your contribution: $6,575 (10%)
• Employer match: $3,288 (5%)
• Total invested: $9,863 per year

That’s like giving yourself a 5% raise just by contributing. Don’t leave that money on the table.

Example: $65,750 salary

Scenario	Gross Salary	Pre-Tax Contribution	Taxable Income	Federal Taxes	Take-Home Pay	Retirement Savings	Employer Match	Total Retirement Savings
No Contribution	$65,750	$0	$50,000	$5,914	$59,836	$0	$0	$0
10% Contribution	$65,750	$6,575	$43,425	$4,976	$54,199	$6,575	$0	$6,575
10% + Employer Match	$65,750	$6,575	$43,425	$4,976	$54,199	$6,575	$3,288	$9,863

With contributions + match, your total value = $64,062 (take-home + savings) vs. $59,836 with no contribution — plus you paid less in taxes.

Roth 401(k): Another Option

Some employers offer a Roth 401(k). With this option, you contribute after-tax money, but withdrawals in retirement are tax-free. This can be a smart hedge if you expect to be in a higher tax bracket later.

Why Consider Roth for Future Tax Advantages

We don’t know what tax rates will be decades from now. With a Roth, you pay taxes upfront and all future growth/withdrawals are tax-free. If rates rise, that can save you a lot and let you keep more in retirement.

What if You Don’t Have a 401(k)?

If you work for a school, nonprofit, or public organization, you may have a 403(b) instead.

A 403(b) works much like a 401(k): payroll deductions, possible employer matches, tax advantages, and the same annual contribution limits. The main difference is investment options are often narrower — usually mutual funds and annuities.

But bottom line? A 403(b) is still a powerful retirement vehicle — automatic, tax-advantaged, and simple to use.

What About a Solo 401(k)?

If you’re self-employed with no employees (except maybe your spouse), you may qualify for a Solo 401(k). Here, you play both employee and employer:

• As employee: you contribute up to the standard 401(k) limit.
• As employer: you can add up to 25% of business income.

This allows you to save much more while lowering your taxable income. Solo 401(k)s are especially powerful for entrepreneurs who want to accelerate retirement savings.

Fiduciary vs. Money Manager

When you’re seeking advice, knowing who to trust matters.

• Fiduciary: Legally required to act in your best interest. Paid transparently (flat fee or % of assets). Their success = your success.
• Money Manager (or broker): Only required to meet a “suitability standard.” That means recommendations just have to be okay, not the best. They may push products with higher commissions or hidden fees.

💡 Key takeaway: Fiduciaries must put you first. Non-fiduciaries don’t always.

Choosing Investments & Understanding Risk

When contributing, you’ll need to pick how your money is invested. Options usually include index funds, mutual funds, and target-date funds.

• Hands-on? Pick individual funds yourself.
• Hands-off? Many plans default you into target-date funds — risk levels adjust as you age.

Some say “be aggressive when you’re young, conservative as you age.” At FreeYourselfDaily, we focus on your comfort with risk.

Ask yourself:

• How much risk are you comfortable taking?
• Would a 20% dip make you panic, or could you ride it out?
• How soon will you need the money?

Why It Matters & The Power of Compounding

The earlier you start, the more compounding works in your favor. Your money grows on itself, year after year, creating a snowball effect.

Example:

• Age 28
• Salary: $65,750
• 10% contribution: $6,575
• Employer match: $3,288
• Total yearly investment: $9,863
• Annual return: 8%

By age 65, this could grow to ~$2M — even though less than $370k was your own contributions. The rest is compounding.

💡 If you increased to 15% contributions, the balance could reach about $2.7M by retirement. And that’s from just one investment vehicle.

Things to Remember About a 401(k)

• It’s a retirement vehicle, not a regular savings account.
• Pulling money early usually triggers taxes + penalties. Wait until retirement!
• Contribution limits apply ($23,500 in 2025, plus catch-up if over 50).
• The real power comes from consistency and time.

Dollar-Cost Averaging (DCA) means you invest the same amount of money on a regular schedule, no matter what the market is doing. Sometimes your money buys shares when prices are high, sometimes when prices are low. Over time, this averages out the cost of what you’ve bought—removing the pressure of trying to “time the market.”

This naturally happens in a 401(k) because your contributions are taken out of every paycheck. For example, if you get paid twice a month, money is automatically invested for you twice a month. That steady drip of investing is dollar-cost averaging in action.

It’s one of the biggest advantages of a 401(k)—you’re automatically investing consistently, without needing to think about it or stress over market ups and downs.

Step 3 Conclusion: Take Action

You now see why a 401(k) (or 403(b)) is such a powerful tool: automatic contributions, pre-tax savings, employer match, and Roth options for tax flexibility.

The most important step today: start contributing and capture the match. Don’t worry about mastering every investment detail yet — we’ll cover that later. Right now, the win is setting up automation and building momentum.

Where You’re At Now

By Step 3, you’ve:

• Built a 6-month emergency fund
• Paid off debts outside your mortgage (and maybe a modest car loan)
• Dialed in your income and spending
• Opened your first long-term investment vehicle — and it’s automatic

That’s huge. You’ve shifted from protecting your money to growing your money.

Next, in Step 4, we’ll add a second investment vehicle to build even more freedom for your future.