Free Money? Nah, I’m Good!

Free Money is free, Duh!

Oct 11, 2024

Not everyone likes free money. Wait, what? I have a friend who just turned down another $5,000. In fact, he’s been doing this for 44 years now!

As it turns out, there are literally millions of people who are turning down free money every day.

The 401K plan was created in 1978 and went into effect January 1, 1980.

In general, employees who are at least 21 years old and have worked for at least one year are eligible to contribute to a 401(k) plan. However, employers can choose to set or remove the age requirement. While millions of workers are entitled to participate in these employer-sponsored plans, only a small fraction actually accepts this opportunity to save for their future.

Free Money? No Thanks

Let me tell you a tale about my buddy, Dave. Now, Dave is a nice guy—real friendly, loves a good barbecue, and has a smile that could light up a whole room. But when it comes to money, Dave’s about as stubborn as a mule in a mud puddle. You see, every time his job offers him free money through a 401(k) match, he just shakes his head and says, “Nah, I’m good!” It’s like turning down free pizza at a party. Who does that?

Now, let’s break this down a bit. Dave earns a whopping $100,000 a year, and his employer is willing to match 5% of his salary in his 401(k). That’s $5,000 every year just for showing up to work! But Dave, in his infinite wisdom, thinks, “Why bother?” Little does he know, this free money could turn into a whole treasure chest down the road.

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The Magic of Compound Growth

Let’s travel back in time to 1980. If Dave had accepted that $5,000 match every year since then (which he didn't), it could have grown thanks to the magic of compounding. Picture a snowball rolling down a hill, getting bigger and bigger—just like his money! This is what’s known as the snowball effect.

Here’s a fun formula called the CAGR (Compound Annual Growth Rate) that we can use. If we assume an average historical annual return of 10% from an S&P 500 index fund, we can figure out how much his employer's contributions would have grown. The formula looks like this:

Future Value=P×(1+r)n\text{Future Value} = P \times (1 + r)^nFuture Value=P×(1+r)n

Where:

PPP is the annual contribution ($5,000)
rrr is the growth rate (10% or 0.10)
nnn is the number of years (from 1980 to now, let’s say 44 years)

So for Dave’s employer's contribution:

Future Value=5000×(1+0.10)44\text{Future Value} = 5000 \times (1 + 0.10)^{44} Future Value=5000×(1+0.10)44

Plugging that into our calculator (or trusty old abacus), we find that the future value of that $5,000 each year, compounded, would be a jaw-dropping $1,238,357.82! That’s more than enough to buy a fancy sports car—or several!

A Double Whammy of Cash!

Now, let’s say Dave decided to join the fun and contribute $5,000 of his own money every year. If we add that to his employer’s contribution, that’s a total of $10,000 a year. Using the same formula, we can see how much all of that cash could grow:

Future Value=10000×(1+0.10)44\text{Future Value} = 10000 \times (1 + 0.10)^{44} Future Value=10000×(1+0.10)44

And this one takes us to a whopping $2,476,715.64! Now that’s what I call a comfortable retirement!

Most people would agree that putting aside just 5% of a $100,000 salary is eminently doable. If they understood that this only added up to $220,000 in contributions over a 44 year work life to result in almost 12 times that amount due to compounding, this would represent a no-brainer proposition for most.

Why Turn Down Free Money?

Now, you might be wondering, why would Dave turn down such a sweet deal? Well, it’s a classic case of being short-sighted. Maybe he thought he had better things to spend his money on, constantly buying shiny new things, maybe even living beyond his means. Many people think the only way to use money is to spend it, like buying a new car or a fancy vacation.

Perhaps he didn’t trust leaving the money with his employer’s trustee, thinking they might run off with his money some day. By leaving that free money on the table, he’s missing out on a future that could be filled with relaxing vacations, golf outings, or just plain ol’ peace of mind.

In the end, accepting free money isn’t just about today; it’s about tomorrow. So, the next time you hear someone say “Nah, I’m good!” when it comes to free money, remind them of Dave. And maybe—just maybe—they’ll think twice before turning down the best deal since sliced bread!

Please leave a comment and share what you would do if offered the chance to get free money. Would you pass on free money or would you say, “Yes, please”?

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Retirement: One Dividend At A Time

Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.

Disclosure: I am long all RODAT Portfolio names. The Portfolio continues to build dividend income with reliable, dependable equities which have long histories of increasing the dividend.

Retirement: One Dividend at a Time