The last couple years have sent Americans on a roller coaster ride of financial fear and uncertainty. Foreclosures, lay-offs and dwindling investment portfolios have rocked our belief in the old rules of money management. Many young people have (finally) picked up the lesson that saving beats spending especially during tough times. However, what worries me is that saving through 401-Ks is being offered as a magic bullet to all our financial woes. Investing in your 401-K offers definite advantages. But like any decision about your money, it is important for you to step back and consider your entire financial situation before plunging in and maxing out your 401-K. Ask yourself the following five questions before you stash a huge chunk of your salary into your 401-K.

1. Why am I still paying interest? If you have student loans or credit card debt, then ask yourself why you’re paying interest on the one hand and hoarding money in an inaccessible plan such as the 401-K on the other. If you have a variable rate loan, you’re even more vulnerable to an increase in your interest rates. Figure out how you can get minimize your interest payments before you max your 401-K.
2. Do I have an emergency fund? You need to save at least three months worth of living expenses before you’re ready to max your 401-K. Your emergency fund should include your rent/mortgage payment, transportation expenses (gas, metro pass etc.), grocery and utilities bills and also an amount set aside for emergency medical care.
3. Is a reason to spend coming up? Planning to get married or going back to grad school in the next few years? Do a rough calculation of how much money you will need to spend and make sure you have the amount accessible. It is not a smart idea to rely on your credit card to carry you through large expenses because if you are unable to make the minimum payments then the damage to your credit score may be larger than the benefit of maxing out your 401-K.
4. Does my employer offer a match? An employer match is free money on the table for you to grab. This should definitely drive you to enroll in the 401-K and contribute upto the employer match limit. Whether or not to save invest beyond the match will depend on your other financial circumstances.
5. Does my plan offer me enough investment choices? A good 401-K plan should offer a good variety of stock and bond funds, as well as a mix of value and growth investing. It should also offer you a chance to invest in emerging markets such as China, Brazil and India, which offer very attractive returns and diversification benefits. If your plan DOES NOT offer enough choices, it may make sense to find your own investment alternatives.