Kevin O'Leary Shares the Most Overlooked Reason Why Americans Can't Ramp Their 401(k) Contributions

Although US workers understand that Social Security cheques are designed to support retirement earnings and not entirely replace monthly workplace income, most depend heavily on Social Security benefits to get by.

A good percentage of US retirees rely on monthly Social Security cheques to pay for food, shelter, bills, and even to support their families. As threats to Social Security benefits' continuity emerged this year due to federal actions led by the US Department of Government Efficiency, many eligible people are claiming benefits much earlier than planned, getting locked into lower monthly cheques for life.

While people also understand that 401(k) plans and individual retirement accounts (IRAs) are the top retirement investment vehicles capable of securing their financial futures, most people fail to contribute adequately in their working years. In turn, people miss out on the power of compounding on higher contributions, additional tax breaks, and even the chance to utilise employer-matching contributions, which are essentially free money.

Shark Tank's Kevin O'Leary revealed that people find it very difficult to max out their 401(k)s because of their spending habits.

Many people spend more than they earn and end up putting a good portion of their income into repaying high-interest debts and rising bills, leaving very little for future investments.

'You are in constant fear of losing your job or your assets losing their value. You worry that one big, unexpected bill might put you under for good, and then you avoid that thought,' O'Leary has noted in one of his books. 'You're avoiding the phone and people to whom you owe money. Maybe you're retreating from friends and family out of fear or shame.'

'You're steeped in magical thinking about money — for example, believing you're one lottery ticket, inheritance, or windfall away from total financial transformation,' he wrote. 'You wake up in despair, and you go to bed defeated. You don't live within your means because you don't even know what they are.'

However, he believes that people who feel like this should work on rectifying their thought processes as early as possible, beginning with understanding their current financial situation.

Kevin O'Leary's One Metric for Money Management

Getting a good sense of your financial situation is the first step to trimming monthly costs and saving more for investments in 401(k) accounts.

O'Leary believes in simplicity and urged people to take a straightforward approach to money management by bringing down finances to a single metric: positive or negative.

As a first step, he suggested that people calculate their overall income over three months. In case pay stubs aren't accessible, a manual review of bank statements can do the job of tracking all cash inflows, which could involve salaries, side gigs, or rental income.

In the second step, O'Leary wants individuals to list all expenses clearly. The list should include small purchases like coffee or snacks as well as major expenses like debt repayments, utility bills, home maintenance costs, etc.

The final step is to subtract total expenses from total income. If the end figure is positive, individuals can immediately consider increasing their monthly 401(k) contributions, according to O'Leary

However, a negative figure means some adjustments are required, and the extent of the changes needed depends on how big the negative figure is. While some people might be able to discipline their spending on their own and reach a positive cash flow status, complex financial situations might require the intervention of a financial adviser.