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A nest egg can help you save for future goals, such as buying a home or for your retirement. Building a nest egg is an important part of a financial strategy, as it can help you cover any emergency costs that might crop up and allow you to become financially secure.
A financial nest egg requires some planning and commitment. In general, the sooner you start building a nest egg, the better.
Key Points
• A financial nest egg is important for securing long-term goals and handling unforeseen expenses.
• Setting SMART financial goals means they are specific, measurable, achievable, relevant, and time-bound.
• Managing finances through a budget helps in allocating resources towards building a nest egg.
• Automating savings allows for consistent contributions to a nest egg, which could help with achieving financial goals.
• Putting money in savings vehicles with compound interest potentially accelerates growth, supporting both long-term and short-term needs.
What Is a Nest Egg?
A financial nest egg is a large amount of money that an individual saves to meet financial goals. Usually, a nest egg focuses on longer-term goals such as saving for retirement, paying for a child’s college education, or buying a home.
A nest egg could also help you handle emergency costs, such as unexpected medical bills, pricey home fixes, or car repairs. There is no one specific thing a nest egg is for, as it depends on each person’s unique aims and circumstances.
Understanding How a Nest Egg Works
To successfully build a nest egg, there are a few factors to keep in mind.
• You have to have a plan. Unlike saving for short-term goals, building a nest egg takes time and you need a strategy to make it happen. A common technique is to save a certain amount of money each month or each week.
• You need a place to stash your savings. This may sound obvious, but in order to save money every week or month, you have to put it in a savings account of some sort, such as a high-yield savings account. If you “save” the money in your checking account, you may end up spending it instead.
• Make it untouchable. In order for your nest egg to grow so that you can reach your savings goals by a certain age, you have to protect it. Consider it hands-off.
How Much Money Should Be in Your Nest Egg?
There is no one correct amount a nest egg should be. The amount is different for each person, depending on their needs and what they are saving for. If you’re using your nest egg for a down payment on a house, for instance, you’ll likely need less money than if you are planning to use your nest egg for retirement.
If your nest egg is for retirement, one common rule of thumb is to save 80% of your annual income. However, the exact amount is different for each person, depending on the type of lifestyle they want to have in retirement. For instance, someone who plans to travel a lot may want to save 90% or more of their annual income.
What Are Nest Eggs Used for?
Nest eggs are typically used for future financial goals, such as retirement, a child’s education, or buying a house.
A nest egg can also be used to cover emergency costs, such as expensive home repairs, medical bills, or car repairs.
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5 Steps to Building a Nest Egg
1. Set a SMART Financial Goal
The SMART goal technique is a popular method for setting goals, including financial ones. The SMART method calls for goals to be (S)pecific, (M)easurable, (A)chievable, (R)elevant, and (T)ime bound.
With this approach, it’s not enough to say, “I want to learn how to build a nest egg for emergencies.” The SMART goal technique requires you to walk through each step:
• Be Specific: For example, if you’re saving for emergencies, target an amount to save in an emergency fund. One rule of thumb is to save at least three to six months’ worth of living expenses, in case of a crisis like an illness or a job layoff.
• Make it Measurable and Achievable: Once you decide on the amount that’s your target goal, your next task is to figure out how to reach that goal. If you want to save money from your salary to reach a total of, say, $3,000 for your emergency fund, you could put $200 a month into a high-yield savings account until you reach your goal. Be sure to create a plan that’s measurable and doable for your situation.
• Keep it Relevant and Time-bound: The last actions in the SMART method are to keep your goal a priority, and to adhere to a set timeframe for achieving it. For example, if you commit to saving $200 per month for 15 months in order to have an emergency fund of $3,000, that means you can’t suddenly earmark that monthly $200 for something else.
2. Create a Budget
Saving money takes time and focus. Making a budget is a way to help you save the amount you need steadily over time. There are numerous budgeting methods, so find one that works for you as you build up your nest egg.
You could try the 50-30-20 plan, for instance, in which you allocate 50% of your money to musts like rent, utility payment, groceries, and so on; 30% to wants, such as eating out or going to the movies; and 20% to savings. You could also explore zero-based budgeting. Try out your selected method to ensure that you can live with it.
3. Pay Off Debt
Debt can be a major obstacle to building a nest egg, especially if it’s high-interest debt like credit card debt. If you’re struggling to pay down debt, making it a priority to repay what you owe can help save you money on interest and also reduce financial stress.
Adding debt payments into your monthly budget is one way to help keep your debt repayment plan on track. In addition, there are specific methods you can use to repay debt.
Debt Repayment Strategies
These are two popular debt repayment strategies you might want to explore — the avalanche method and the snowball method.
The avalanche method focuses on paying off the debt with the highest interest rate as fast as possible. You continue to pay the minimum monthly amount on all your other debt, but you direct any extra money you have the highest-interest debt. This method can generally save you the most money in the long run.
The other option is the snowball method, which focuses on paying off the smallest debt first while making minimum payments on all other debts. When one debt is paid off, you take the payment that went toward that debt and add it to the next-smallest one, “snowballing” as you go.
This method can be more psychologically motivating, as it’s easier and faster to eliminate smaller debts first, but it can cost more in interest over time, especially if the larger debts have higher interest rates.
Finally if you’re having trouble paying down a certain debt, like a credit card or medical bill, it might be worth calling the lender. In some cases, lenders may work with individuals to create a manageable debt repayment plan. Call the lender before the debt gets out of control.
4. Make Saving Automatic
Automating your savings simplifies the act of saving with automatic transfers of money from your paycheck directly into your savings account. It can be a steady way to build your savings over time, since you don’t even have to think about it or remember to do it.
Not only that, because the money isn’t hitting your checking account, you won’t be tempted to spend it.
Set up automatic transfers to your online bank account every week, or every month. While you’re at it, set up automatic payments for the bills you owe. Don’t assume you can make progress with good intentions alone. Technology can be your friend, so use it!
5. Start Investing in Your Nest Egg
In addition to a savings account, you might also want to explore options like putting some of your money in a money market account or certificate of deposit (CD). Both types of accounts tend to earn higher interest rates than traditional savings accounts.
CDs come with a fixed term length and a fixed maturity date, which can range from months to years. You generally need to leave the money in a CD untouched for the length of the term, or you’ll owe an early withdrawal fee. With a money market account, you can access your money at any time, though there may be some restrictions.
To help build retirement savings over time, consider participating in your employer’s 401(k). Some employers offer matching funds — if you can, contribute enough to your to get the employer match, since it is essentially free money.
The Power of Compounding Interest
When saving money to build a nest egg in certain savings vehicles such as a high-yield savings account or a money market account, the power of compound interest can work to your advantage.
Here’s how it works: Compound interest is earned on the initial principal in a savings vehicle and the interest that accrues on that principal. So, for instance, if you have $500 in a savings account and you earn $5 in interest, the $5 is added to the principal and you then earn interest on the new, bigger amount. Compound interest can help your savings grow. Use a compound interest calculator to see this in action.
Why Having a Nest Egg Is Important
A financial nest egg can help you save for retirement and/or achieve certain financial goals, such as buying a home or paying for your child’s education. By building a nest egg as early as you can, ideally starting in your 20s or 30s, and contributing to it regularly, the more time your money will potentially have to grow.
The Takeaway
Building a nest egg starts with setting financial goals and then creating a specific plan of action to reach them. Using a method like the SMART goal technique, it’s possible to build a nest egg for an emergency fund, a down payment on a house, or retirement. You can use a budgeting system to help stay on track, and automate your savings to make saving simpler.
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FAQ
What is a financial nest egg?
A financial nest egg is a sum of money you save or invest to meet a certain financial goal. A nest egg typically focuses on future milestones, such as retirement, paying for a child’s college education, or buying a home.
How much money is a nest egg?
There is no one specific amount of money a nest egg should be. The amount is different for each person, depending on their needs and what they’re using the nest egg for. For instance, if a nest egg is for retirement, some financial professionals suggest saving at least 80% percent of your annual income.
Why is it important to have a nest egg?
A nest egg allows you to save a substantial amount of money for a financial goal, such as retirement or your child’s education, for instance. By starting to build a nest egg as early as you can, the more time your money has to grow.
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