Remember the old children’s song,“There’s a Hole in My Bucket,” about the guy whose bucket kept leaking water? No matter what he came up with, nothing worked to keep it full. And there was always something that kept him from plugging his bucket.
It’s a funny song, but it reminds me of something much more serious—the state of many employees’ 401(k)s. Way too many workers are stuck in a cycle with their money that keeps leading to the same results, so they can’t gain any forward movement. And because they can’t—or won’t—change their behavior, they end up doing disastrous things like withdrawing money or taking loans from their retirement accounts. We’re seeing heavy 401(k) leakage everywhere!
For any company taking the time to set up a 401(k), or even generous enough to give an employer match, the situation is frustrating. You just hate to see that kind of waste! And that’s just among the people who are participating.
There’s also the problem of workers who say they can’t enroll in a 401(k). Or can’t invest much once they do. It’s crazy to think that 48% of Americans have less than $10,000 saved for retirement.
So, why can’t more workers save and get ready to retire on time? From what I’ve seen in dealing with thousands of business owners and HR managers in America, the reason so many employees are in financial deadlock is obvious—it’s a hole-in-the-bucket problem. The bucket they’re putting their investment into isn’t solid, so it can’t hold water! Many employees are either encouraged to or auto-enrolled in a 401(k) prematurely. But without taking several key steps to build the right foundation before investing, the inevitable happens: The money employees are putting into their retirement accounts (and companies are often matching) washes right back out through loans and early withdrawals.
To explain why this happens and find a way to stop it, I want to talk about three steps every worker in America should take before going anywhere near a 401(k). Investing is the fourth step but without taking these initial steps first, nobody can experience real financial wellness. Those who aren’t investing yet shouldn’t start until they’ve taken all three steps. And those who are already saving in a 401(k) should stop for now—until they’ve done all three steps.
The long-term goal should be big, consistent investment into a 401(k). It’s a worthwhile investment as an employee benefit—not only for getting workers prepared to retire on time, but also for your company’s return on investment (ROI). When financial wellness is working to cause real behavior change, it also creates more productive workers who are happier and more loyal. But the only way true financial wellness is going to happen is by changing out bad habits for healthy ones.
We’ve been helping employees do just that with their personal finances for more than 25 years. According to Ramsey Research’s The National Study of Millionaires (the largest study of millionaires ever conducted with over 10,000 surveyed), eight out of 10 millionaires invested money in their company’s 401(k). And they kept it there! Plus, three out of four millionaires said that regular, consistent investing over a long period of time is the reason for their success.
Here’s how we teach employees to start putting away plenty of money in their 401(k)s, and stop taking out a dime until they’ve retired:
Step One: Save $1,000 in Cash
If your employees are ever going to become healthy financially, they need a quick win to start. Actually, they need several, because if they’re anything like the typical worker, they’ve been on a long financial losing streak. A quick win is like an appetizer when you’re starving, but you know the main course is still a ways off—like chips and cheese to tide you over while you’re waiting for the big burrito.
That’s what saving $1,000 in cash represents for people in financial distress. They finally have a little emergency fund—some cushion for life’s inevitable bumps along the way. You’d be shocked by how many of your workers may have never saved that amount. Even more shocking is the fact that 40% of Americans can’t even cover a $400 emergency! That’s why this step is so important.
I can’t tell you how many employees I’ve heard from who tell me that having this starter emergency fund transformed the way they saw their paycheck and helped them take decisive action with their money.
So, why do we teach employees to do this before saving for retirement? Because as important as retirement is, emergencies are even more urgent. And if workers don’t have $1,000 on hand in cash, they’re simply going to use credit cards (and pay outrageous interest) or drain their 401(k) to cover stuff like busted pipes and car repairs. That’s like using a leaky bucket to move water.
Remember: The key to this entire journey is helping employees focus on the larger goal of consistent savings in their 401(k)s. For most people, it’s easier to achieve their big goals for the future if they have a clear plan made up of short, workable action steps.
Step Two: Pay Off All Non-Mortgage Debt
With $1,000 saved for emergencies, employees are on a little high. They’re feeling some hope about their money! But chances are, they’re still hungry for more quick wins. That’s where the debt snowball comes in. What’s that? It’s a list of all debts ranked from smallest to largest, and it’s the only way to help employees get the quick wins they need to pay off all their debt.
Your employees should go after their smallest debt first with the same intensity they used to save that $1,000. (Obviously, they’ll continue making minimum payments on their other debts while working on that smallest one.) When the first is paid off, they’ll shift what they had been paying onto the next debt in line.
This approach allows workers to do two key things: build momentum toward becoming debt-free and check things off their list as they move ahead financially. By starting with the smallest debt, they’ll have something to point to that says, “I did it! Now keep going!”
“But what about interest rates?” you ask. As a math nerd, I hear what you’re saying. But again, this journey to real financial wellness is all about motivating real and lasting behavior change. And that has very little to do with the math or the percentages. But it has a whole lot to do with hope—and nothing gets people moving like a string of wins on a scoreboard!
With the debt snowball, most employees we work with become debt-free (everything but their mortgage) within 18–24 months. Now they’re really getting somewhere! And without debt to worry about, they’re nearly ready to throw some serious cash into their 401(k). But not just yet.
Step Three: Save Three to Six Months’ Worth of Living Expenses
Hopefully, you can see the connection between being debt-free and getting ready to invest. People who live paycheck to paycheck (otherwise known as 78% of Americans) either aren’t investing at all or are saving way too little to build any significant wealth. But once employees completely eliminate their debt payments going out every month (except the mortgage), they can get moving on the last small hurdle before hard-core investing begins: building their full emergency fund.
During the year or so that employees spend paying off their debt in step two, they typically find that they can fend off the occasional financial surprise with the $1,000 cash they saved up in step one. Even if they have to go back and replenish it a couple of times, they’re getting good practice in smart money management while working toward larger, long-term goals.
But for most people, $1,000 simply isn’t enough ready cash to cover everything that can happen in the course of a year—or even a really bad month. The truth is, most people need a much larger fund in order to be truly secure. Employees must take a long, hard look at their budgets and figure out how much money they would need to survive for three to six months in case of the unthinkable. Murphy’s Law is going to happen. And big, unexpected emergencies, like a spouse losing a job or a sudden medical need, can completely change their lifestyle.
Having that large of a safety net in place can work wonders for employees and their families. And it’s the last big step away from paycheck-to-paycheck living and toward hard-core retirement savings. With a savings of three to six months of expenses in place, your employees won’t need to borrow money ever again when Murphy comes calling.
Step Four: Put 15% of Income in a 401(k) and Other Tax-Advantaged Retirement Accounts
Now we hit the step most people jump into prematurely. But if your employees can knock out the three steps we just outlined before they start participating in a 401(k), they’ll be in a much better spot for themselves and their families. Why? Because instead of only investing up to the level of the company match, or maybe going a couple of pay percentage points above that, they’ll actually be able to start investing 15% of their income. And they’ll do it without any thought of taking loans against it or messing up compound growth with early withdrawals.
By simply taking the extra year or two that most people need to complete the first three steps toward real financial wellness, employees will begin investing three or four times the amount per month that most participants ever save. And again, they’ll be able to do it with far more confidence that their plans are going to work. This is the key to stopping the cycle of paycheck-to-paycheck living and plugging the leaky 401(k) bucket.
Way too many employees have holes in their financial buckets. But it’s anything but funny to live that way. Taking these steps in order prepares them to make their really big dreams—like saving for college, paying off their house early, and setting themselves up for retirement—not just a nice thought but a reality. What’s more, your company will begin to enjoy the ROI that comes from greater engagement and retention. That’s real financial wellness!
 Ramsey Solutions Research, “Retirement in America,” 2016.
 Ramsey Solutions Research, “The National Study of Millionaires,” 2018.
 Federal Reserve, “Report on the Economic Well-Being of U.S. Households in 2017,” 2017.
 CareerBuilder, 2017.