Eleanor Laise at The Wall Street Journal writes today on a recent trend of what employees have been doing this past month: loading up on their company’s stock. Hewitt Associates did research and discovered a rare jump in contribution amounts to 401(k) plans while pulling funds out of other investments, including less risky bond funds.
For someone with debt, and generally for someone with financial insecurity, it does not make sense to heavily concentrate one’s investments. Also, the costs of covering basic expenses without enough emergency savings if one were to lose their income – i.e. job for most people – are steep. If one has credit card debt, the most effective strategy for financial health and security is to stop contributions into the retirement account and apply those funds instead to aggressive debt reduction payments. This is true even if there is an enticing employer match to a contribution: eliminating housing debt versus beefing up the retirment account is an interesting question, but filling the retirement account while revolving credit card debt or other high-interest loans is a recipe for a financial headache.
Some employees might argue that concentrating investments in their own company shows confidence in its ability to succeed. This might be true, but even the best-designed organizations, with killer products, well-defined corporate strategies, five star leadership, and juicy target markets can be undermined by factors like unexpected interruptions to supply chains due to political, environmental, or macroeconomic issues. In short, do not bet the entire retirement account on company stock given the uncertainty of the current climate, because if severe losses come, then it will be that much more difficult to reduce debt and keep the personal finances in order.
Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.
