When allocating your earned cash towards investing, think about what "free money" you might be leaving on the table.
Have you ever taken a moment to think about the ways you could be accessing “free money” by simply doing a bit of research and asking the right questions? Not everyone can take advantage, but if your primary source of income is earned through employment you should certainly take the time to ensure that you are not leaving money on the table.
In this article we will talk about a few ways that you could be tapping into “free money” by doing nothing more than a bit of research into what you could be entitled to. Once you have these products in place, sit back and let them work for you.
Employer share plan
You can surely think of a time when you’ve heard about a big company taking a decision which didn't benefit their loyal customers, nor did it benefit their hard-working employees, but it sure did benefit their shareholders! This would conjure up images of fat cats sitting in ivory towers, taking advantage of the little guy. Well, what I learned early on was that as an employee, I could be on both sides of the coin. On the one end, I earned my fixed monthly salary as an employee of the company, but I could also gain on the other end by becoming a shareholder, making money when the company made money. I could do this by participating in the company’s Employee Share Plan. These programs allow employees to buy shares of the company at a discounted price compared to the open market price. You earn as the company’s share price increases over time, as well as through dividends paid out to all shareholders when the company is doing well. By actively participating in the employee share plan, I was benefitting from the company’s profits as a shareholder, while as an employee, I was contributing to its growth.
Over 10 years of participating in the plan, my employers' share price increase by 240%! So even holding a small number of shares resulted in a nice little profit in my account for doing nothing more than signing up to the plan and holding those shares over time.
To find out whether your employer offers an employee share plan, speak to your Human Resources representative.
Keep in mind that often these share plans are open to employees at one fixed time in the year, so if you miss the deadline, you have to wait until the next enrolment period to participate. Also, there is often a requirement to hold the shares for a fixed period of time, this could be one year, two years, or more. So, for that period of time, you cannot cash out. You should also personally believe that your employer will continue to do well, either because it is an established market leader, or you are genuinely behind its mission and vision as a company. If you can tick those boxes, then why not buy the company shares at a discount and make money when the company makes a profit!
Tax deferred retirement account – company match
Another great way to access “free money” is through your employer's company match on the pre-tax earnings you contribute from your salary towards your retirement savings plan. Many companies offer a ‘company match’, which means that they will match either a proportion, or the same amount as you have personally contributed to your retirement savings fund that year. To benefit from this scheme there is often nothing that you have to do, other than sign up to participate in the retirement savings plan and continuing to make your personal contributions. At the end of the year, or the start of the new year, you will see a nice bump in your account as your employer adds their financial contribution to your retirement savings pot.
How matching works: Assume your employer offers a 100% match on all your contributions each year, up to a maximum of 3% of your annual income. If you earn $60,000, the maximum amount your employer would contribute each year is $1,800. To maximize this benefit, you must also contribute $1,800. If you contribute more than 3% of your salary, the additional contributions are unmatched.
(Source: Investopedia)
If you are unsure whether your employer offers a company match, speak to your HR representative. They can explain to you how to sign up for the retirement savings plan and also the rate of company match they will contribute based on your savings.
Tax beneficial retirement savings
On the topic of saving towards your retirement, another way to take advantage of “free money” is by participating in a tax deferred retirement savings plan such as a 401(k) in the U.S. or, a Workplace Pension, Personal or Stakeholder Pension in the U.K.
By taking advantage of a tax deferred retirement plan, you are making pre-tax contributions towards your retirement account, which means when your salary is calculated for income tax owed, it will consider the salary figure after your retirement contributions have been deducted. So, in other words, if you earn 80k per year and you make an annual contribution of 15k towards your retirement savings account, your income tax will be based on 65k income, not the original salary amount of 80k. Therefore, not only are you planning for the future by putting money away which will support you in retirement, but you are also reducing the amount of tax you owe today, which can be a nice saving.
To take advantage of “free money” you simply need to be aware of what is available, assess whether it matches your profile of risk and sign up for those services which you may be entitled to. It won't take much effort on your part other than getting the required administration in place, then you sit back and allow these products to do the hard work for you over time.
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