Debt $ense

In light of Aleta’s comment below, I figured I’d break down how my 401(k) is arranged.

Since I get my company match in company stock, but don’t invest any of my own money into said stock, my existing balance mix is always a bit different than my future contributions.

That said, I make my contributions to 30 percent each international, large-cap and mid-cap stock funds and 10 percent balanced. I don’t contribute anything regularly to a pre-mixed fund, but I am moving half my company stock into that fund, with the other half in the balanced fund.

That means my actual balance now is: 6 percent company stock, 28 percent mid-cap, 26 percent international, 34 percent large-cap and 3 percent each balanced and pre-mixed.

In July, when I get my annual raise, I’ll also do my annual rebalancing to transfer money from the funds with a greater percentage than my plan to ones with a lower percentage. For example, some of the large-cap money will move to international and mid-caps, and my company stock will move to balanced and pre-mixed. It’s a good rule of thumb to do this once a year or so to make sure your overall investments don’t get out of whack. If a fund’s actual balance is way off your future contributions, then your risks and returns will be different than what you actually want (assuming your contributions reflect how you want your money distributed).

Depending on what the raise looks like, I might increase the contribution by a point or two. More likely, I’ll keep it at the minimum to get the full company match and increase my debt repayment. I should be able to add $15-$25 a week to the payment, which means another $60-$100 a month on top of the $580 I’ll already be paying. (Once my cable bill is adjusted to reflect the fact I now only have internet, I’ll be able to pay $8 more a week.) That will help me pay down debt faster, which means I can increase my contribution to about 15 percent by this time next year.

I’ve been getting a lot of questions from co-workers about 401(k)s lately, and I’m kind of surprised at how little people understand about them. I guess my parents did me more of a favor than they thought when they got me that Zillions subscription as a kid.

Jennie’s rules for 401(k) contributions

1. Don’t put your own money into company stock. If the company match is in company stock, regularly transfer it to other funds. You already have too much of your future tied up in your company’s financial success, especially if your have stock options or a pension. Don’t put your 401(k) in their hands too.

2. No matter how broke you are, always invest at least enough to get the company match. As Suze Orman points out in “Young, Fabulous and Broke,” where else can you get 50 percent or more return on your money? It’s basically free money.

3. Start a 401(k) as soon as you can. The earlier you start, the more you have of your greatest assest - time. One guy I know who’s several years older than me has about 10 times what I do in his account. But if we both stopped investing today, I’ll be way better off when I retire in 35 years than when he retires in 20 because the balance keeps compounding.

4. Don’t cash out your 401(k) when you leave a job. Count this as a lesson I learned the hard way. I started one when I was 21 and working my first job after college. I built up a decent amount, maybe $3,500 in three years. When I left, instead of being smart and rolling it over, I cashed it out to pay down my credit card. But I wasn’t committed to killing my debt yet, so the balance went back up, I had to pay all the lovely tax penalties and I lost out on all the money I would have earned over the next 40 years.

5. Be wary of taking out a loan from your 401(k). Maybe things will be fine and you’ll be able to pay it back. But what if you lose your job? What if you leave your job? What if you decide you hate your job but can’t leave because you can’t afford to pay back the loan? Taking a loan really restricts your options and shouldn’t be used if you have another alternative.

6. Know what your portfolio should look like for your stage in life. If you invest too conservatively early on, you won’t make enough money to retire on. If you keep an aggressive portfolio too long, you risk a stock market crash or major downturn just as you’re getting ready to join the ranks of the retired. Start out aggressive, and tweak your portfolio over time to be more conservative.

7. Resist the urge to fiddle. This is a long-term investment. Adjusting your contribution rate and portfolio once a year is good. Changing it every other week is not. Also, don’t panic over blips in the stock market, epecially if you’re a 20-something like me. The point of this is long-term investing, not making a quick profit. There are going to be weeks or months that things aren’t doing so well. Keep investing - you’ll pick up more shares because they’re cheaper and be in better shape when the stock market picks up again.

8. That said, when you do move money out of a fund, do it over time. If you have a third of your 401(k) in company stock and you just realized that’s not a smart move, don’t go in tomorrow and move it all out. Figure out how long a time frame you’re comfortable with and divide the balance by that amount, then transfer that amount each week. (My company match amount is fairly small, so I’ve been moving $100 a week, and will be done in June.) This evens out the cost of the stock so you’re less likely to have one of those wonderful moments where you sell off big and the stock shoots up the following week.

Any other suggestions for smart 401(k) investing?