The Basics: There is no such thing as free money... or is there?
Your 401K is an option to invest your money in a tax deductible investment managed by a third party. If you invest $1000 in your 401K today, you get to deduct that from your income this tax year (2014). That money grows (or shrinks) in your investment portfolio with tax-deferred status - this means you don't pay any tax on the earnings until you actually withdraw any money from the 401K account in retirement.
Many companies match a portion of your 401K investment and they can do so on any ratio they choose. Receiving a 1:1 match means your company will match every dollar you invest in your 401K up to a certain dollar limit the company will specify. Others may have different ratios.
The basic idea behind ensuring you invest minimally up to the portion matched by your employer is that the money the company matches is "free money". You don't pay income tax on that match and it goes into your tax-deferred 401K. It is literally money your company is giving you today for your retirement "tomorrow", but only if you are also willing to set aside some money for tomorrow.
Most 401K plans will be managed by a large investment group like Vanguard, T Rowe Price, etc. They will have a number of basic options for you to choose when allocating your 401. You can invest in total market funds (mutual funds which are selected to mimic the overall movement of the market); target retirement date funds (shifting allocations based on their interpretation of how much risk your investment should take over time, e.g. that as you age, you have less tolerance for risk as you will need that money for retirement and the investment is automatically shifted to manage that risk); industry or regional mutual funds, etc. If you are still learning about how to allocate your money, a target retirement date fund is typically considered appropriate since it will automatically adjust your risk as you get older - it is the "hands off" approach to investing for your retirement.
Scenario 1: You don't invest anything for ten years, and then invest 17.5K every year for ten years. Assuming a 7% annual return, your investment is worth roughly 250K after that 20 year period.
Scenario 2: You invest 17.5K every year for ten years, and then nothing additional for ten years. Assuming 7% annual return, your investment is worth roughly 500K after that 20 year period.
Scenario 3: You invest 17.5K every year for 20 years. Assuming 7% annual return, your investment is worth roughly 750K
Comparing the scenarios, you can easily see that there is truth to the idea that money invested today is worth more than money invested tomorrow. This is based on the principle of compounding interest. To put it into perspective, by choosing not to initially invest for ten years, you would need to invest TWICE as much (about 35000/year) in years 11-20 in order to make as much as scenario 2.
Advanced Consideration: What happens when one of your 21 balloons pop?
Everyone should build an emergency fund. That is often advised by financial planners as step 1 to financial security - even before all other considerations. In today's job market, and indeed in life, there are few guarantees. You could lose your job, be sued, or worse. It is minimally recommended that you save enough to live your current lifestyle for 6 months without additional income (some advise up to 12 months in lieu of the great recession). That means covering not only your living expenses (e.g. rent, food, etc) but also your student loan payment, life insurance premium, etc. The basic idea is that if you were to ever lose your source of income, you would have some cushion to prevent you from defaulting on loans or going hungry. You never want to be in the position to have to withdraw from retirement savings (you can actually take a "loan" from your 401K, but that comes at a stiff tax penalty) or take second mortgages on a house just because you failed to plan for a completely reasonable contingency.
Advanced Consideration: Only two things are certain in life - death and taxes
Understanding your tax liability today and in the future is very important to developing a solid overall strategy. Regardless of how you feel about taxes, financially speaking, your objective should always be to limit how much tax you actually pay. If you feel that you underpay (and some people do), you can always use that money for good causes.
As an example, if your employer may only match up to $6000 (made up number), it may still be worthwhile to invest your full 17.5K tax-deductible amount in a 401K. If your income was 100K and you invested 6K in your 401K, your taxable income is 94K. If you invested the full 17.5K, then your taxable income drops to 82.5K. Lowering your AGI (adjusted gross income) could do several things, not the least of which is drop you into a lower incremental tax bracket (e.g. from the 36% to the 33%). Yes, it means that you would be foregoing money today, but if you are investing post tax dollars in non-retirement securities, then you are paying tax on that money twice: this year and in whatever year you sell your investment and record the income. Even if your tax bracket is the same (lets just say 30% for giggles), the net effect is that you save substantial money by investing your full 401K limit. By investing only 6K, you pay 28,200 in taxes on 94K income meaning you "kept" 71,800 of the original 100K salary. By investing the full 17.5K, you pay 24,750 in taxes on 82.5K income meaning you "kept" 75,250 of the original 100K salary - a difference of 3450 which would have been paid as tax. So yes, you will have less money today, but with the power of compounding interest, you will have a LOT more money tomorrow.
Another big tax consideration is purchasing a home. Not only do some places offer first-time home buyer incentives (federally I believe the program was terminated, but not sure on this), but the interest payments to the bank is considered tax deductible. This is an often forgotten benefit to home ownership which lazy or new realtors often forget to express.
There are many deductions (additional schooling, children, installing solar energy cells on the roof of your home, etc). Take advantage of those which make sense for you. Really read into the tax code to understand it. If you can pass pharmacy school, you ought to be able to do your own 1040 without assistance.
Advanced Consideration: Rules? More like guidelines. Sorry, its Pirate Code.
Check with your 401K plan. Some plans (if not all) allow you to invest up to 51K in any tax calendar year. Only 17500 K is tax deductible in the current tax year, but the growth in the investment can be tax-deferred. If you are investing for retirement in excess of your tax deductible 17.5K, then this is potentially a viable option. It is not an option if you want more flexibility. Perhaps you want to invest additional dollars for retirement now, but want the option of using that as a child's college fund if needed 20 years from now - in which case, don't invest post-tax dollars in the 401K. But later in life, when the kids are out of the house, and your house, cars, student loans and credit cards are paid off, and your financial liabilities are at an all time low, it can be quite beneficial to invest more into the 401K, even with post-tax dollars. Know the rules of your 401K plan.
Advanced Consideration: What did Darwin teach us about tolerance and extinction?
Diversify in every sense. Diversify your investments in all their characteristics. Some investments are more liquid (e.g stocks) while others are hard to move quickly (e.g. house) - this has an effect on your ability to scrounge up cash quickly. Some investments are risky (e.g. individual stocks) while others pool risk (e.g. index funds). Some investments have high yield and high risk (e.g. some bonds) while others have low yields and low risk (e.g. other bonds). It also means that even though it is tempting to invest in five oil companies with fabulous dividend payouts, it still exposes you to a lot of risk because a lot of your eggs are in one basket. It is the same reason why a number of financial planners advise against investing your retirement in company stock - you are putting your source of income and your future income in the hands of one company. This isn't to say that Walgreens is about to collapse and disappear, but there was a time in the not to distant past when Rite Aid stock was less than a quarter per share - the value of the company's inventory was worth more than the company as a whole. It is not an impossibility that RA could have folded, but look at it now.
When All Else Fails... Follow the wisdom of the Oracle of Omaha
When others are greedy, be fearful and when others are fearful, be greedy. Warren Buffet has a number of rules of investing but that is fundamental.
Lastly, in nearly every survey of the traits of millionaires with their respect to investing, there are two fundamentals - they don't panic quickly (e.g. they have some tolerance of risk) and yet they know when to fold their hand (e.g. putting good money after bad is never sound). They recognize that they will rarely be able to time the market "perfectly" in order to buy low and sell high, so it means sometimes they will have ended up leaving some money on the the table, but if you pursue a long term strategy, it behooves an investor to accept that fact. And learn be savvy about when the market is genuinely turning for your investment. Think of investments like old cars. Why would you spend 4K putting a transmission into a car worth nothing? The car in running shape might still only be worth 2K, in which case, you lost 2K. And speaking of cars, it is very tempting to buy nice, fancy cars because the income of a pharmacist permits such luxury. But a car is a depreciating asset - it is worth less with every mile you drive.