401(k) vs. Other Investments: What is the Fastest Path to Financial Freedom?

Ravi Kurani
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Investing in your 401(k) consistently will certainly lead to financial freedom. So will investing in stocks and other assets.

The question is: which one gets you to financial freedom faster?

It’s not a simple question, and the answer depends a lot on your current assets, risk tolerance, and income level.

That said, there are some general pros and cons to 401(k) vs. other investments. In this article, we’ll walk through them to figure out which one is the fastest path to financial freedom.

401(k) Plan vs. Stock-Picking

We should clarify something right off the bat. While many people think of “401(k) vs. investing” as a dichotomy, this isn’t entirely accurate.

Technically speaking, your 401(k) is an investment. (More on that later.)

When people say “401(k) vs. investing”, what they mean is 401(k) vs. stock-picking, taxable mutual funds, and even more volatile investments like cryptocurrency and NFTs. There are pros and cons in each category, so let’s dive into each of them in detail.

401(k) Retirement Plan

Your 401(k) is a retirement plan. Except in very rare exceptions, any money you put in your 401(k) remains inaccessible until you turn age 59½.

So if your goal is to achieve financial freedom as fast as possible, why would you put your money into an asset that you can’t access until a certain age?

One of the biggest advantages is that you put in your pre-tax income, then deduct that amount from your taxable income. Then, once you reach retirement age, you withdraw those funds and pay taxes at that point.

Generally speaking, about 30% of an annual $2,000 contribution is effectively canceled out just by the tax savings. And if you leave that money in even for just a few years, the growth potential is hard to ignore.

What’s more, most employers offer a match for your 401(k) contributions up to a certain amount, typically 3-6%. If you don’t contribute to your 401(k), you’re leaving that free money on the table.

Here’s a breakdown of the pros and cons of investing in a 401(k).

401(k) Pros and Cons

Stock Picking & Other Investments

While investing in retirement is a safe, reliable way to achieve financial freedom down the line, it’s not going to help you get there in 5-10 years. This is why it’s important to look at other investments that can provide a more accessible passive income.

While regular investments won’t shield you from taxes, they do give you access to funds on your timeline, not an arbitrary standard of “retirement age.” On top of that, you get to choose any type of investment: from conservative money market funds to highly aggressive mutual funds, stocks in individual companies, or even volatile assets like cryptocurrency or NFTs.

In terms of taxes, capital gains taxes (taxes on the profits gained from your assets) fall into two categories:

  • Short-term capital gains. When you hold a particular asset for less than a year, the growth in profit is calculated the same as additional income. You’ll receive a 1099 from your financial institution the same as if you had done some contract work for them.
  • Long-term capital gains. For assets held more than a year, you’re taxed in three brackets—0%, 15%, and 20%—depending on the size of the gain as well as your filing status.

Another thing to keep in mind is that the stock market can be particularly volatile. If you’re saving for a time-bound goal—say, you want to buy a house and your rental lease is up in three months—you may be forced to sell your stocks at an inopportune time.

You should also consider your skill as an investor, and whether you have what it takes to perform well in the market. This is where having a trustworthy financial advisor is a fantastic asset.

Below is a breakdown of some of the pros and cons of choosing your own investments.

Stock Picking Pros and Cons

How to Decide Between Your Investment Options

Ultimately, the decision between a 401(k) plan and choosing your own investments is a decision between long- and short-term financial goals.

Long-term goals include retirement planning and paying off a mortgage: actions that will set you up for a good life in your later years. Short-term goals include paying off debt, covering basic expenses, and generating an immediately accessible passive income.

Ideally, your investment plan should include both.

If you don’t plan for the future, then you’re going to wake up one day and realize you’ve run out of time. But if you only save for the future, it’s easy to get burnt out and give up on the plan.

Plus, no one is guaranteed to live to retirement—it’s important to live in the present.

The first step you should take is to invest enough in your 401(k) to claim your employer match. That way, you’re not leaving free money on the table.

After you claim your match, use as much of your expendable income as possible to pay off credit card debts, build an emergency fund of three to six months of expenses, and make sure that you have adequate health insurance to cover costly emergencies.

From there, the amount you put toward retirement vs. choosing your own investments will depend on your risk tolerance. Talk to a financial advisor to see which option will be best for you.

Bottom line: you don’t have to pick and choose. Take advantage of the benefits that each approach offers you, using it to set yourself further on the path to financial freedom.

If you want some support to help claim your 401(k) match, we can help. Fill out the form below to see how much you qualify for.

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