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How to Build a Nest Egg

November 20, 2020 · 6 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

How to Build a Nest Egg

A nest egg is a large amount of money or assets that someone saves or invests to meet a certain financial goal. Usually, a nest egg focuses on longer-term financial goals such as saving for retirement, paying for a child’s college education, or buying a home.

There is no one answer for what a nest egg should be used for, as it depends on every individual’s unique financial and budget goals. A nest egg could also help individuals to prepare for unexpected emergency costs—such as large medical bills, pricey home fixes, or car repairs.

Building a nest egg generally requires some planning and commitment, but growing a nest egg can be a good financial goal to work toward. Here’s how to get started.

5 Steps to Building a Nest Egg

Step One: Set Financial Goals

Before the process of building a nest egg begins, it can be helpful to set clear money goals to aim for. Having a plan and sticking to it can be one of the best ways to make progress towards financial goals.

The SMART goal technique is a popular method for setting goals, including financial ones. The SMART technique calls for goals to be (S)pecific, (M)easurable, (A)chievable, (R)elevant, and (T)ime bound.

For example, with this approach, it’s not enough just to say, “I want to build a retirement nest egg.” With the SMART goal technique, an individual might opt instead to outline things like:

•   How much money is needed for retirement?
•   How will that specific financial goal be achieved? (i.e., with a 401(k) or other retirement account)
•   What are some milestones to measure progress towards goals against?

Individuals can try out this approach by mapping out clear and actionable steps to work towards their goals—making sure that not only the main goal but also each step is specific, measurable, achievable, relevant, and time bound. Here are some possible ways to map out an action plan:

1. Break up the goal into smaller steps and write each step down
2. Note what resources are available to help take each step and what resources are still needed to get the job done
3. Set a deadline for the completion of each individual step, as well as an overall deadline for the main goal
4. Consider sharing progress made with a loved one. It can be helpful to set a check in schedule to encourage accountability

Step Two: Create a Budget

One way to make achieving nest egg goals more within reach is to create a budget that is easy to follow and accounts for the SMART goals. The main objective of a budget is to outline how much money someone makes and how they tend to spend their money. A good budget can help identify where someone can spend less and where they might potentially be able to save.

To start a budget, gather any bills and pay stubs that make it easy to identify ongoing monthly income and expenses. Then look at old credit card and debit card statements to identify typical spending on groceries, transportation, and other necessary monthly expenses.

Next, note spending habits in less discretionary spending categories—things like travel, dining out, and clothing.

It can be helpful to break expenses down into categories, which can make it easier to identify if one’s spending is higher in one category (for example: high spending on entertainment subscription services).

After creating subcategories, add them up and note what the outflow and inflow look like for both income and expenses. Afterward, subtract the expenses from the income to discover how much money is left over each month. This is the amount of money that can potentially be set aside to help build a nest egg.

A budget can be a great way to make spending more mindful. Once the budgeter gains a better understanding of their budget, they can set spending limits for each category. Adding in savings goals as monthly “expenses” can be an easy way to prioritize saving. In many cases, it can be convenient to automatically put a percentage of each paycheck into a savings account.

Refreshing this budget from time to time is wise, as income and expenses can fluctuate. Gradually increasing savings goals while also decreasing spending can make it feel more natural to integrate a new budget. Having a support system can help improve accountability, as can reviewing spending on a monthly basis to see where there are impulses to spend unnecessarily and where savings can be found.

Step Three: Pay Off Debts

Debt can be a major roadblock in building a nest egg, especially if it’s high-interest debt. Those who are struggling to pay down debt may not be able to put as much money into savings as they would like. Prioritizing paying down debt quickly can help save money on interest and reduce financial stress. Adding debt payments into a monthly budget can be one smart way to make sure a debt repayment plan stays on track.

Some people find it beneficial to consult a credit counselor. Credit counselors can work with an individual to create a realistic debt repayment plan. Certified credit counselors are typically available for in-person meetings, and won’t promise to fix every debt-related problem. Credit unions, universities, military bases, and U.S. Cooperative Extension Services can be good places to start a search.

In paying down debt, it’s usually worth calling the lender to whom the debt is owed. In some cases, lenders may work with an individual to create a manageable debt repayment plan. Calling the lender before the debt is sent to a debt collector is key, as many debt collectors don’t accept payment plans.

Here are two popular debt repayment strategies that might be worth researching: the highest interest rate method and the snowball method.

The highest interest rate method focuses on paying off the highest interest rate debt as fast as possible, because its interest is costing the consumer the most. This method can save the most money in the long run.

The other option is the snowball method, which can be more motivating as it focuses on paying off the smallest debt first while making minimum payments on all other debts. When one debt is paid off, the individual tackles the next-smallest debt. 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.

Step Four: Understand the Value of Compound Interest

When saving money to build a nest egg, whether in a savings account or a retirement account, it can be helpful to understand compound interest. Put simply, compound interest is interest that the saver earns on interest.

The Rule of 72 is a handy equation that can predict when an initial fixed-rate investment will double in value. Divide the number 72 by the investment’s interest rate (also known as the expected rate of return).

That number will show how many years it will take the initial investment to double, and every time that number of years passes, the investment will double again.

Making money grow via compound interest is a great way to save more without putting any extra effort in.

Step Five: Make Investments

Many people choose to invest their money to build their nest egg, rather than place it in a savings account that offers interest. While not all investments have a guaranteed return, the money earned on investments can be reinvested in a manner similar to how compound interest works.

It’s worth noting that unlike with deposits guaranteed by federal deposit insurance in the banking world, investments like stocks, mutual funds, and bonds can fluctuate greatly with market conditions. There is no guarantee someone will make money from their investments and they can lose value.

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That being said, stocks tend to have the highest return over many decades. Bonds can provide higher returns than savings accounts, but less than stocks usually do. However, bonds are less risky than stocks. Mutual funds are more of a mixed bag, as the risk associated with mutual funds varies based on the underlying risks of the stocks, bonds, and other investments held by the fund.

While there are risks associated with investments, the average rate of return for investing in the U.S. stock market over the past 140 years was 9.2%.

Building a Retirement Nest Egg

One nest egg everyone should build is a retirement nest egg. The average American spends about 20 years in retirement, so it’s extremely important to prepare for that chapter financially.

While there are a number of strategies for saving for retirement, including investing in 403(b) Plans and SEP Plans, the following three options are very popular retirement savings plans.

•   Individual Retirement Arrangement (IRA): With an IRA, it’s possible to make tax-deferred investments that can help provide financial security during retirement.
•   Roth IRA: When it comes to Roth IRAs, qualified distributions are tax-free if certain requirements are met and it’s possible to make contributions to a Roth IRA after the age of 70 ½.
•   401(k) Plan: This popular option, offered through employers, can be extra beneficial if an employer makes financial contributions (“matches”) to the 401(k). Elective salary deferrals can be excluded from taxable income, but distributions and earnings are includable as taxable income during retirement.

Because these retirement savings plans are investment accounts, the sooner someone starts saving for retirement, the sooner their savings can begin to grow past their contributions. Any day can be a good day to start saving for retirement.

The Takeaway

Like most financial decisions, building a nest egg starts with articulating goals and then creating a specific plan of action to reach them. Budgets can be assessed and debt repayments mapped out—but, with careful planning, it’s possible to build a nest egg for retirement, a home, education, or other life goals.

No matter where someone is on their investment journey, from first investment to expert-level investing, SoFi Invest® can provide support.

Those who are too busy to actively manage an investment portfolio can sign up for automated investing based on their risk tolerance and desired outcomes. It only takes $1 to get the ball rolling. And SoFi’s financial planners are ready to answer those tricky investment questions.

Find out more about investing with SoFi today.


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