This is a guest post from A.J. Clark, a long-time lurker at Get Rich Slowly. A.J. is a potential Staff Writer for GRS. He is a recent college graduate who writes software in the financial services industry, while trying to find his financial footing in the Real World. In his first post, A.J. explained that he’s hoping to finish ahead by starting behind.

As I mentioned in my previous post, I recently transitioned into my role as a salaried employee at my job.

Along with the increase in work responsibilities, I am now eligible to receive a variety of benefits from my employer, which include various forms of insurance, a 401(k) plan, and other fringe benefits such as flexible spending accounts for health-related purchases.

In August, I will make my first contribution to a 401(k) plan, which is quite a big step for me considering how much debt I have left to pay off. After all, every dollar that I put into my 401(k) plan I could be using in other ways — to make a principal payment on my student loans, or to further build my emergency fund.

On the surface, not making a principal payment on my student loans does not seem to carry a large opportunity cost. However, the majority of my student loan debt is tied up in two high-interest student loans from a private lender, with over $25,000 currently carrying a 10% interest rate that will change whenever the Federal Reserve alters the federal funds rate.

Theoretically, student loan debt is supposed to be on the same level as mortgage debt, in that it should not be a burden on the borrower, and is regarded as a “good” debt to have. Due to their interest rates, my private student loans are on the same plane as my credit cards, and therefore should be paid off as soon as possible.

Losing My Appetite
Since I receive matching contributions from my employer to my 401(k) up to a pre-determined dollar amount, the decision to contribute to my 401(k) was not difficult.

For instance, suppose my employer matched the first $1500 of contributions that I made to my 401(k). This means that if I put $1500 into my 401(k), I would receive $1500 dollars from my employer at the end of the year — an effective return of 100% on my investment!

When I initially thought about contributing to my 401(k), I thought that I would contribute only enough money to receive the full match from my employer. “Why be greedy?” I thought to myself; 100% interest is much better than what most others are receiving on their investments.

When I had this mentality, my appetite for risk completely disappeared. I wanted to grab ahold of the 100% return that I thought I would be receiving, and not let go of it. I wanted to invest my entire 401(k) portfolio in long-term treasury bonds, to ensure that the principal amount that I invested into the plan would be safeguarded from the current market turbulence. I did not want the market to cause me to lose money that I worked hard to earn, and wanted to see saved.

Thinking about a more diverse (and aggressive) portfolio was simply out of the question; I needed to safeguard my fictitious principal balance at all costs. The voice in the back of my mind frequently reminded me that the money in my 401(k) could be paying off high interest debt instead, and that I should be careful with it.

Getting Hungrier
What I failed to realize is that putting money into a 401(k) is a long-term, life-altering decision, especially at my age. As far as I know, my parents have little to no money saved for retirement, and they are much closer to retirement age than I am. Yet, I am twenty-one years old, and despite the ridiculous amount of debt I am in, I am still able to make a meaningful contribution to my future, one that will hopefully allow me to end up in a better place than my parents are.

With the help of a family member, I realized that the money that I am investing now I am not going to need to use for at least another forty years. He convinced me that I am in a position now where I can afford to take a moderate amount of risk, and be reasonably aggressive in my asset allocation, whereas thirty years from now this will not be the case.

Although I still shudder at the thought of my investments significantly decreasing in value, I realized this week that I should not concern myself with the day-to-day ups and downs of my portfolio. I also learned that I should try and focus on the fact that I am saving money to secure my financial future, and that short-term losses will eventually be trumped by long-term gains.

Unlike many other individuals, I did not lose a lot of money during the recession because I did not have any money invested in the markets to begin with. With a greater appetite for risk, I can be sure that I will not miss out on the inevitable upswing in the markets, and I will be able to further grow my investments, and secure my future.

Let me ask you: What is your appetite for risk? Does your age have an influence on it, or do other factors significantly affect it?

This article is about Ask the Readers, Choices, Investing, Planning  Thursday, 13th August 2009 (by J.D. Roth)