Do you have a nest egg?
If not, you need to start building one immediately. A healthy nest egg is vital to your financial security and overall wellness.
What is a Nest Egg?
A nest egg is a financial term for a large sum of money intended for a specific purpose. The funds can be stored in cash, savings, or investments.
Traditionally, the term nest egg refers to retirement planning, but there are other reasons why a nest egg might be useful.
What is a Good Nest Egg?
There is no perfect number for a “good” nest egg.
I’m not going to lie and tell you a million dollars is the ideal nest egg when it might be too high or too low for your specific needs.
The harsh truth is that a “good” nest egg differs for everyone. It’s not an easy round number I can give for general audiences. It’s a specific number that works for you.
But there’s good news. It’s not that difficult to determine a reasonable estimate for your nest egg.
Explore your personal financial goals. Do the math and determine how much money you really need, not just for those goals but also for retirement, your legacy, charity, and anything else that’s a priority for you.
Consider your current age and how your investments might grow over time. Due to potential gains, you may need to save and invest far less than you initially thought.
When you factor in all of these, you can develop an excellent estimate of your nest egg number. You can always speak with a financial advisor if you want a more precise figure.
How Do I Build My Nest Egg?
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Your calculations may have resulted in a massive number that seems impossible to reach.
How can you go from nothing to such a huge sum?
Breath. It’s possible.
Here’s how to start yours.
Start Small
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For inspiration, look to the wise words from an ancient Chinese proverb, which JRR Tolkien used in his inspirational work The Lord of the Rings:
“A Journey of a Thousand Miles Begins with a Single Step.”
A nest egg of a thousand dollars begins with a single dollar.
It’s the same thing.
To build your nest egg, start small. I started with just five dollars a paycheck, and now I’m on track for Coast Fire with nearly 20 years left until I reach traditional retirement age.
You can do the same. Start with whatever you can afford to save, even if it’s just a dollar or two.
Increase When You Can
I wouldn’t be on track to coast to retirement if I didn’t incrementally increase my savings rate. Although I started with only five bucks per paycheck, I increased it with every raise until I was investing at least 5%.
When you get a raise, put the extra money towards your nest egg. You’ve been living without it, so you won’t miss it.
Get the Match
If your company offers a 401K with a company match, do everything possible to get the full match. It’s free money.
Let’s say you make $50,000 per year, and your company offers a 5% match. If you invest 5% in your 401K, your company will pay you an extra $2500 per year. It’s a guaranteed return on your investment that will add up to a massive nest egg over time.
Save More Money
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Many of us can’t save for a rainy day because we spend too much today.
It’s time to take a hard look at your budget. Are you overspending on eating out, retail, too much car, or streaming services?
Think about Benjamin Franklin’s most famous proverb:
“A penny saved is a penny earned.”
Each dollar you can cut from your budget is an extra dollar you can add to your nest egg. The financial security you gain will be worth the sacrifice.
If you need to find ways to save more money, our saving money page has a wealth of resources, from saving on groceries to heating to living expenses.
Rely on Investment Gains
My contributions (and match) account for about 52% of my investment portfolio. The other 48% came from investment gains.
I’ve nearly doubled my money by relying on investments to fund my nest egg.
Although interest on savings accounts is higher than it has been in the last twenty years, it’s still not enough to fully fund a nest egg.
You need to invest.
Explore our Beginners Guide to Investing to discover the safest, easiest ways to grow your money.
Keep a Hands-Off Approach
People fear investments, and with good reason. A bad market can wipe out a nest egg. That’s the risk with investing.
However, historically, people who stayed invested, even in the worst downturns, made money over time.
You can’t control or time the market. You’re more likely to lose big if you constantly pull money out and put it in based on the random news of the day.
Instead, use a set-it-and-forget-it approach. Try not to stress during downturns—most likely, things will recover.
Conduct Annual Reviews
It’s okay to review your holdings on a regular schedule. I like to rebalance my portfolio every year to ensure I’m not relying too heavily on any specific sector.
A yearly review lets you ensure that your portfolio still meets your needs. Limiting it to once a year ensures that you don’t react emotionally to the investment news of the day.
Work with a Financial Advisor
You don’t have to figure out all this investment stuff yourself (though you can – you’re capable! Check out our DIY Financial Coaching Bundle for help getting started!).
If you need help, work with a fee-based financial advisor. Fee-based advisors have a fiduciary responsibility to their customers (YOU!), so you can rest assured knowing they aren’t guiding you towards bad investments that make them money at your expense.
A good financial advisor can help you determine your financial goals and invest your money wisely to achieve them.
Increase Your Income
Sometimes, there’s simply not enough money. When you can barely pay the bills, saving for the future seems like a pipe dream.
It’s time to increase your income.
Consider starting a side hustle or working extra shifts for overtime if your job allows it. Improve your skills to get a better job, rent out a spare room, or sell the things you no longer need.
Every little bit helps.
How Should I Invest My Nest Egg?
Once you have the funds to build your nest egg, the next crucial question is where to put them.
If you want to ensure financial security for the rest of your life, you need to invest it. Although numerous complicated investment vehicles are available, the best bet is to keep it simple.
I recommend four investment options:
- Traditional Retirement Accounts
- Roth Individual Retirement Accounts (IRA)
- Non-Retirement Brokerage Accounts
- Real Estate
Here’s why you should explore these three investments.
Traditional Retirement Accounts
Your employer-sponsored retirement account is the absolute best place to start your nest egg. We already discussed the match, which is like free money, but it also has tax benefits.
Most employer-sponsored accounts let you contribute pre-tax dollars, which lowers your taxable income now. You will have to pay tax on the money when you withdraw it, but most of us will be in a lower income bracket post-retirement than pre-retirement. In addition, the tax-free contributions allow you to invest more money upfront, giving it more opportunity to grow.
If your employer doesn’t offer a 401K, you can still reap the tax-free benefits by opening a traditional IRA with most brokerages.
Roth IRA
A Roth IRA is a special type of retirement account that allows you to invest for retirement with post-tax dollars. Since you have already paid taxes on the money you contributed, you don’t have to pay taxes when you withdraw (as long as you withdraw after reaching the full retirement age).
Tax rules can get complicated, so it’s vital to understand the tax implications of both a traditional and Roth IRA when deciding which option is right for you.
I have both a Roth IRA and an employer-sponsored retirement account.
Non-Retirement Brokerage Accounts
Is your nest egg only for retirement? Do you want to wait until traditional retirement age to use the money?
A non-retirement brokerage account can bridge the gap.
These accounts have no special tax benefits, but you can invest or withdraw as much as you want whenever you want without penalty (outside normal capital gains taxes).
Brokerage accounts allow you to invest in anything the market offers, from mutual funds to individual stocks to exchanges.
Your best bet is to keep it simple by investing in a diversified, low-fee index fund. I like Vanguard’s total market index fund because it provides instant diversification across the entire market, and it pays dividends (which I reinvest for growth).
Real Estate
Real estate is still a great way to build wealth and contribute to your nest egg.
A primary home with a paid-off mortgage is a vital asset for retirement security. It ensures that your biggest expense, housing, is taken care of, which is a huge boon to your nest egg.
To grow your nest egg even larger, consider investing in real estate. However, be warned that it’s not as easy as many “real estate influencers” on the web make it appear. Investing in real estate is a risky endeavor, but you can make a lot of money if you understand the risks.
What About a Savings Account or Certificate of Deposit (CD)?
While investing is crucial to growing your nest egg, you should keep some of your money in a savings account or CD to mitigate risk.
I keep about 20% of my nest egg in a high-yield savings account. This money is protected by the FDIC (Federal Deposit Insurance Corporation) and is not subject to the whims of the market.
The disadvantage is that it doesn’t earn enough in interest to beat inflation, and interest rates could drop at any time. The money is a safety net against the worst market turmoil – ensuring I’ll never withdraw during a downturn.
Start Growing Your Nest Egg Today!
A nest egg is vital for financial security and to help you achieve your life goals. It’s time to start yours today.