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 important costs or 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?
So what is a nest egg exactly? A financial nest egg is a large amount of money that someone saves and/or invests to meet a certain financial goal. 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 medical bills, pricey home fixes, or car repairs. There is no one answer for what a nest egg should be used for, as it depends on each person’s unique aims and circumstances.
💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.
Understanding How a Nest Egg Works
There are a few things to know about how to successfully build a nest egg.
• You have to have a plan. Unlike saving for short-term goals, building a nest egg takes time and you need a strategy. A common technique is to save a certain amount each month or each week.
• You need to save your savings. This may sound obvious, but in order to save money every week or month, you have to put it in a savings or investment account of some sort. If you “save” the money in your checking account, you may end up spending your savings.
• Don’t touch your nest egg. The flip side of that equation is about spending: In order for your nest egg to grow and for you to reach your savings goals by a certain age, you have to make it untouchable. When saving a nest egg, you have to keep your saved money out of reach and protect it.
How Much Money Should Be in Your Nest Egg?
There is no one correct and specific amount a nest egg should be. The amount is different for each person, depending on their needs. It also depends on what you’re using your nest egg for. If you’re using it to buy a house, for instance, you’ll likely need less than if you are using your nest egg for retirement.
As a general rule, some financial advisers suggest saving 80% of your annual income for retirement. However, the amount is different for each person, depending on the type of lifestyle they want to have in retirement. For instance, someone who wants to travel a lot may want to save 90% or more of their annual income.
A retirement calculator can help you determine if you’re on track to reach your retirement goals.
What Are Nest Eggs Used for?
As mentioned, nest eggs are often used for future financial goals, such as retirement, a child’s education, or buying a house.
A nest egg can also be used for emergency costs, such as expensive home repairs, medical bills, or car repairs.
đź’ˇ Recommended: Retirement Planning: Guide to Financially Preparing for Retirement
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 technique calls for goals to be (S)pecific, (M)easurable, (A)chievable, (R)elevant, and (T)ime bound.
With this approach, it’s not enough just 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: How much money is needed for an emergency? One rule of thumb is to save at least three months worth of living expenses, in case of a crisis like an illness or layoff. But you also approach it from another angle: Maybe you just want $1,800 in the bank for car and home repairs.
• Make it Measurable and Achievable: Once you decide on the amount that’s your target goal, you can figure out exactly how to build a nest egg that will support that goal. If you want to save money from your salary, such as $1,800, you’d set aside $200 per month for nine months — or $100 per month for 18 months. Be sure to create a roadmap that’s measurable and doable for you.
Last, keeping your goal Relevant and Time-bound is a part of the first three steps, but it also entails something further: You must keep your goal a priority. And you must stick to your timeframe in order to reach it.
For example, if you commit to saving $200 per month for nine months in order to have an emergency fund of $1,800, that means you can’t suddenly earmark that $200 for something else.
2. Create a Budget
It’s vital to have a plan in order to create a nest egg — for the simple reason that saving a larger amount of money takes time and focus. A budget is an excellent tool for helping you save the amount you need steadily over time. But a budget only works if you can live with it.
There are numerous methods to manage how you spend and save, so find one that suits you as you build up your nest egg. There’s the 50-30-20 plan, the envelope method, the zero-based budget, etc. There are also apps that can help you budget.
Fortunately, testing budgets is fairly easy. And you’ll quickly sense which methods are easiest for you.
3. Pay Off Debt
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.
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 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.
Debt Repayment Strategies
Here are two popular debt repayment strategies that might be worth researching: 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, because the interest is costing you 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, 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.
4. Make Saving Automatic
Behavioral research is pretty clear: The people who are the most successful savers don’t mess around. They put their savings on auto-pilot, by setting up automatic transfers based on their goal.
Behavior scientists have identified simple inertia as a big culprit in why we don’t save. Inertia is the human tendency to do nothing, despite having a plan to take specific actions. One of the most effective ways to get around inertia, especially when it comes to your finances, is to make savings automatic.
Set up automatic transfers to your savings account online every week, or every month. While you’re at it, set up automatic payments to the debts you owe. Don’t assume you can make progress with good intentions alone. Technology is your friend, so use it!
5. Start Investing in Your Nest Egg
The same is true of investing. Investing can be intimidating at first. Combine that with inertia, and it can be hard to get yourself off the starting block. Also, you may wonder whether it makes sense to invest your savings, when investing always comes with a possible risk of loss (in addition to potential gains).
You may want to keep short-term savings in a regular savings or money market account — or in a CD (certificate of deposit), if you want a modest rate of interest and truly don’t plan to touch that money for a certain period of time. But for longer-term savings, especially retirement, you can consider investing your money in the market. SoFi’s automated investing can help you set up a portfolio to match your goals.
You can also set up a brokerage account and start investing yourself. Whichever route you choose, be sure to make the contributions automatic. Investing your money on a regular cadence helps your money to grow because regular contributions add up.
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, compound interest can be a major growth factor. Put simply, compound interest is interest that you earn on interest.
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 high-yield savings account and you earn $5 interest on that amount, 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 the following compound interest calculator to see this in action.
With investments, compound returns work in a similar manner. Compounding returns are the earnings you regularly receive from contributions you’ve made to an investment.
Compound returns can be achieved by any type of asset class that produces returns on both the initial amount — or the principal — as well as any profits or returns that are generated after the initial investment. Some investment types that earn compound interest are stocks and mutual funds.
đź’ˇ Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).
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 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 have to grow and weather any market downturns. For instance, if you start investing in your nest egg at age 25, and you retire at age 65, your money will have 40 years to accumulate.
Investing in Your Nest Egg With SoFi
Like most financial decisions, building a nest egg starts with articulating 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 retirement, to buy a home, pay for a child’s education, or other life goals.
Because a nest egg is typically a larger amount of money than you’d save for a short-term goal, it’s wise to use some kind of budgeting system, tool, or app to help you make progress. Perhaps the most important ingredient in building a nest egg is using the power of automation. Use automatic deposits and transfers to help you save, pay off debt, and even to start investing.
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
What is a financial nest egg?
A financial nest egg is a substantial amount 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 advisers 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 retirement or to pay for 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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