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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.

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.

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.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

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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SOBNK-Q325-111

Morningstar is a well-respected global financial services and research company that provides data, analysis, ratings, and a range of tools to help institutional and individual investors sort through and evaluate some 600,000 investment vehicles.

Since 1984, Morningstar has conducted independent research on stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. While the company collects and analyzes data on many aspects of many different assets, it’s primarily known for its five-star rating system.

Morningstar ratings aren’t predictive. But because their research is conducted independently, they are able to provide an evaluation of past performance, and potential risks and return factors that many investors find useful.

What Are Morningstar Ratings?

The Morningstar ratings system is a tool investors can use to compare financial securities such as mutual funds and ETFs, stocks, bonds, and other securities. Particularly valuable to investors: Morningstar ratings evaluate risk-adjusted as well as price-adjusted returns of investments.

Morningstar is an independent financial services company, and thus relies on its own data and research to evaluate the performance, risks, pricing, and other aspects of certain investment products.

Morningstar reviews of mutual funds and ETFs also reflect how a fund performs relative to its benchmark and to its peers. The main Morningstar ratings investors may turn to learn more about a particular investment are the Star Ratings and Analyst Ratings. (Morningstar also has a separate ratings system for individual stocks.)

These ratings can be helpful to investors for a variety of reasons — whether they’re trying to diversify their portfolios, or do some research into socially responsible investing, and trying to find investments that fit their strategy.

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How Morningstar Ratings Work

As Morningstar itself describes, the ratings system uses a methodology based on specific categories and risk-adjusted return metrics. The company will only rate a fund that’s been around for more than three years. Morningstar also updates its ratings on a monthly basis.

You can use these ratings to select the funds available in your 401(k), buy stocks online or through a traditional brokerage, or to decide which funds to add to an IRA or a taxable brokerage account.

The “Star Rating” Explained

The Morningstar Star Rating system, usually shortened to Morningstar ratings, is a quantitative ranking of mutual funds and ETFs. Introduced in 1985, the star rating looks at a fund’s past performance, then assigns a rating from one to five stars based on that performance.

As mentioned, Morningstar reviews ETFs and mutual funds with a record of more than three years, so newer funds do not receive a star rating until they’re reached this milestone. The rating methodology utilizes an enhanced Morningstar risk-adjusted return measure. Specifically, the star ratings system looks at each fund’s three-, five-, and 10-year risk-adjusted returns.

Star ratings can serve as a report card of sorts for comparing different funds, based on how they’ve performed historically. The Morningstar ratings are not forward-looking, as past performance is not a foolproof indicator of future behavior. But investors can use the ratings system as a starting off point for conducting fund research when deciding where to invest.

Morningstar ratings are free, and investors who are selecting investments for a traditional IRA, Roth IRA, or other retirement or investment account, may find it helpful to sort through the many available options.

If you’re looking for a tool to help you compare mutual funds or ETFs at a glance based on past performance, the star rating system can help.

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The “Analyst Rating” Explained

The Morningstar Analyst Rating takes a different approach to ranking funds and ETFs. Instead of looking backward, the qualitative analyst rating looks forward to assess a fund’s ability to outperform similar funds or a market benchmark.

Rather than using stars, funds receive a rating of Gold, Silver, Bronze, Neutral or Negative, based on the analyst’s outlook for performance.

The firm does not update analyst ratings as frequently as star ratings. Morningstar reviews for analyst ratings are reevaluated at least every 14 months. The firm typically assigns analyst ratings to funds with the most interest from investors or the most assets.

When ranking funds, analysts look at three specific metrics:

•   People

•   Process

•   Parent

Performance is also taken into account within the People and Process pillars. In order to earn a Gold, Silver or Bronze rating, an analyst must determine that an active fund can beat its underlying benchmark when adjusted for risk.

Generally speaking, these Morningstar reviews go into more detail, in terms of the analysis, ranking, and comparison of funds.

How Morningstar Measures Volatility

Morningstar uses a few key volatility measurements as it aims to minimize risk and maximize returns through strategic diversification. Chief among those measurements are standard deviation, mean, and the Sharpe ratio.

It’s a somewhat complicated process, but using these three measurements in tandem helps Morningstar get a handle on volatility and make appropriate ratings decisions.

Example of a Morningstar Rating

Morningstar star ratings are free to access for investors on the company’s website, and it’s relatively easy to find plenty of examples of Morningstar ratings on the platform. For instance, to find a star rating for a particular fund or ETF you’d simply search for it using its name or ticker symbol.

You can also view Morningstar ratings and picks for funds by category, such as small-cap funds or U.S. or international index funds.

Here’s an example of a Morningstar rating for the Vanguard Total International Stock Index (VTIAX), as of Sept. 6, 2025. This fund, which is in the foreign large-blend category and is an index fund, has a three-star rating from Morningstar — and a Gold Morningstar analyst rating.

The fund has a lower expense ratio for its category of 0.09%, a minimum investment of $3,000 and $525.7 billion in assets.

While the three-star rating may sound middle-of-the road, it’s likely due to the fund’s slightly higher risk profile. But the Gold analyst rating indicates that the fund has a lower cost, and an extensive market-cap-weighted portfolio that tracks the FTSE Global All Cap ex US Index, which has over 8,000 constituents, providing investors with diversification in overseas equities.

This is just one example. Morningstar researches and provides ratings for thousands of assets in a range of categories and products.

Are Morningstar Ratings Accurate?

Morningstar fund ratings are designed to be a guide as you invest; they cannot predict how well a fund is likely to perform. For example, there’s always going to be risk involved when investing, so don’t expect any rating to be a sure-thing.

Assessing the Reliability of Morningstar Ratings

So, how well do Morningstar ratings perform over time and are they an accurate guide for investing? According to Morningstar’s own analysis of its ratings system, the star ratings can be a useful jumping-off point for investors. That analysis resulted in three key findings:

•   Funds with higher star ratings tend to have lower expense ratios and be cheaper for investors to own.

•   Higher-rated funds tend to be less volatile and experience less dramatic downward swings when the market is in flux.

•   Funds that received higher star ratings tended to produce higher returns for investors compared to funds with lower ratings.

The analysis didn’t look specifically at how star ratings and fund performance aligned through different bull and bear markets. But the ultimate conclusion Morningstar drew is that the Star Ratings tend to steer investors toward cheaper funds that are easier to own and stand a better chance of outperforming the market.

Use Expense Ratios

According to Morningstar, fees are one of the best predictors of future performance, at least for Star Ratings. For funds and ETFs, that means it’s important to consider the expense ratio, which represents the cost of owning a fund annually, calculated as a percentage of fund assets.

Actively managed funds typically carry higher expense ratios, as they require a fund manager to play an important role in selecting fund assets. Passively managed funds and ETFs, on the other hand, often have lower expense ratios.

So which one is better? The answer is that it all comes down to performance and returns over time. A fund with a higher expense ratio is not guaranteed to produce a level of returns that justify higher fees. Likewise, a fund that has a lower expense ratio doesn’t necessarily mean that it’s a poor investment just because it’s cheaper to own. Morningstar’s research found that the average one-star fund cost significantly more than the average five-star fund.

As you do your own research in comparing funds and ETFs, consider both performance and cost. This can help you find the right balance when weighing returns against fees.

How Should Investors Use Morningstar Ratings?

How much do Morningstar ratings matter in the grand scheme of things? The answer is, it depends on what you need from investment research tools.

Morningstar reviews of mutual funds and ETFs can be helpful for comparing investments, especially if you’re just getting started with the markets. Morningstar is a respected and trusted institution and both the Star and Analyst Ratings are calculated using a systematic approach. The reviews aren’t just thrown together or based on a best guess.

They’re designed to be a guide and not a substitute for professional financial advice. So, for instance, you may use them to compare two index funds that track the same or a similar benchmark. Or you may use them to compare two ETFs that are representative of the same market sector.

Risks of Morningstar Ratings

Morningstar ratings are not an absolute predictor of how a mutual fund or ETF will perform in the next five minutes, five days, or five years. After all, there’s no way to perfectly forecast how any investment will perform as the market changes day to day or even minute-to-minute.

One risk to avoid with Morningstar ratings is relying on them solely as your only research tool and not doing your own independent research. Again, that means checking expense ratios as well as looking at the underlying assets of a particular fund and its investment strategy (i.e., active vs. passive) to determine how well it aligns with your goals and risk tolerance.

Looking only at Morningstar reviews without doing your own due diligence could cause you to invest in funds that aren’t the best fit for your portfolio. Or you may overestimate how well a fund will perform, only to be disappointed later.

Morningstar Ratings for Funds

Morningstar’s original rating system of one to five stars enabled investors to evaluate a fund’s past performance within four broad asset classes: domestic equity funds, international equity funds, taxable bond funds, and municipal bond funds.

One useful aspect of the ratings is that they include risk-adjusted and cost-adjusted returns for investors. Given that most investors own several, sometimes many different mutual funds and ETFs in their portfolios and retirement accounts, Morningstar also offers a Category rating — which allows investors to evaluate a fund within a smaller more relevant grouping of related assets.

Also, as it bears repeating, a good, average, or poor Morningstar rating does not mean that an investment is risk-free.

Other Investment Risk Rating Providers

Morningstar is just one of many companies that offers investment ratings. Bloomberg, Nasdaq Market Data Feeds, S&P Global Market Intelligence, MarketWatch, Thomson Reuters, and others all offer investment ratings, rankings, stock and fund screeners, and other tools.

In addition, many financial institutions collect and analyze their own data and offer proprietary metrics and tools that investors can also use to assess those products.

Investors should take into account who is collecting the data, and where that data comes from, when deciding what type of investment rating to use for their own portfolios.

The Takeaway

Having reliable research tools can help you make educated decisions about where and how to invest. Morningstar ratings are one tool you can use. But keep in mind that there are many ratings services on the market, and that Morningstar’s ratings are far from the only research tool out there.

It’s also important for investors to keep in mind that all investments involve risk, whether they’re highly rated or not.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

How reliable are Morningstar ratings?

Morningstar ratings are generally considered to be high-quality in the financial industry, but that doesn’t mean that these ratings are always spot-on. All investing involves risk, and even a high rating doesn’t guarantee that an investment will pan out.

Is a Morningstar rating of “5” good?

Morningstar uses a scale of one to five stars to rate investments, with five stars being the highest, or best-quality investment. So, yes, a five-star rating is generally considered good, although not risk-free.

Why do investors use Morningstar?

Individual and institutional investors alike use Morningstar ratings to help sort through and evaluate the hundreds of thousands of available investment products. Morningstar has developed a reputation for being reliable, because its data is collected and analyzed independently of any financial firm.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.