Sometimes I wonder if the age-old adage of “the early bird catches the worm” wasn’t crafted specifically to refer to somebody’s or a family’s nest egg. Think about it—the folks who start saving for something early and diligently are most likely going to achieve their goal, whether it be enough money to put down on a vacation home, enough money to retire comfortably with, or tuition for their kids. Speaking of, how is your nest egg looking these days? If you are far from the early bird, and have been putting off starting or contributing to a nest egg for awhile (days, months, years?) or are wondering why you even need one in the first place, you’ve stumbled upon just the right article.
What is a nest egg?
Isn’t a nest egg just another word for a retirement fund? Nope. The term “nest egg” can be used to refer to any sum of money that has been set aside, saved or invested for one specific intention. It could be a wedding fund, a college fund, a vacation savings, or certainly a retirement fund. From what I can tell, the origination of the term came from the practice where farmers used to leave a single egg in a hen’s nest to prompt her to lay more. The meaning evolved to money with the intention that people set a chunk of money aside to grow it and are not supposed to touch it except for its intended purpose.
Why every family should have one?
To put it simply, we all want to retire at some point—at least I can only assume we all do! Even if every person or family does not want to have kids, we are all eventually going to reach the age where we are going to need to slow down whether it’s because of physical restrictions or because it is just plain time to stop working. So in all practicality we are going to need the means to live off of at one point or another, and that is exactly what a nest egg can be designed for.
How to determine how much to save?
It’s great to just jump right into it and start stashing away money for your big goal, but you should figure out the end sum of cash that you’re shooting to save up. It always helps to have an actual numeric goal in mind to help you see how good of a job you’re doing. If your nest egg is going to be used for retirement, consider things like what type of lifestyle you want to live when you retire and where you’d like to live. Will you be traveling? What is your income now? Do you have a pension plan that will be kicking in? It might take some days or weeks to come up with a hard number, but determining that number can help you immensely so you’re not saving up for some undetermined sum.
How to start your own nest egg?
Don’t wait until you “find” the money or have “extra” money lying around to invest into your nest egg and build wealth. I can assure you, that is another way of saying that you will probably never get around to starting a nest egg. Honestly—when are you ever going to have “extra” money that you just feel like setting aside? The key is to decide now how much you can cut back on each month, and start stashing it aside. I don’t care if it’s $10 a month; everybody has to start somewhere. Adopt the Nike saying of “Just do it,” and just buckle down and do it! Ask yourself what you most need a nest egg for, then call your bank and open up a free savings account. If they require a minimum balance of $100 or some other fund, consider it your first contribution to the nest egg. Congratulations, you have just started down the path to savings and an ultimate goal.
How to build one
Anybody can start a nest egg, but it takes diligence, consistence, and discipline to build one. Use these tips to keep your nest growing strong and steady:
- Use a budget- How can you know how much to save, if you don’t know how much you’re spending—or where you’re spending? Start using a monthly budget to track your income and spending trends and not only will you be able to figure out what purchases you can cut out, but I almost guarantee there will be one trend that will surprise you with how much you’re really doling out on it (for me, it was lattes.) You can then use this information to scale back on spending (I opted for a less expensive cable package and started brewing my joe at home) and put the money you saved directly into your nest egg. The key is just to stick with keeping track using your budget, be it an Excel spread sheet where you jot everything down to a free online tool like Mint.com, which organizes and categorizes your spending for you.
- Automatic transfers- Feathering your nest with automatic transfers will help it grow without you even thinking about it. Set up a weekly or monthly automated transfer from your checking to your savings account, and watch the nest egg slowly build each month. Ideally, the money you’re having transferred should be something you’re doing without—such as foregoing a meal out or renting a Redbox movie as opposed to spending $11 on a movie theater ticket.
- Hands off- Do not touch the nest egg until it is ready to be used! If it helps, think of your nest egg as an actual egg; you are not supposed to touch it because it is so fragile, and plus the bird parents may reject the egg if you put your grubby paws all over it. Let your nest egg simply grow quietly until it’s ready to be hatched for its intended purpose.
- Use the 10% rule- Professional financial advisors recommend saving 10% of your income. If you use your budget as a tool you should be able to figure out a way to set aside 10% of your monthly income, even if it means scaling back on some of your usual activities. The thing is, nobody is saving for your retirement or your kids’ college fund except you. You can either spend now, and struggle to make up the difference later, or save little by little and build up a nice chunk of change.
- Utilize your 401(k)- If your nest egg happens to be for your retirement, a 401(k) is a good way to go. A 401(k)—which is named after a specific section of the IRS code—originally started off as a way to offer taxpayers a break on their deferred income. These days, a 401(k) is another word for a retirement savings account that requires the consumer to wait until they are 62 years old to touch the money. But a 401(k) is so much more than just a savings account, because employers often will match their employees’ contributions to the account as a form of retention. One big piece of advice that financial advisors offer is to max out the amount that you can contribute each year, since if your employer will match it is simply maxing out the “free” money. And since the money is taken out of your paycheck before taxes it gives you a small tax break as well. For 2012 the maximum contribution to a 401(k) is $17,000 for individuals who are under 50 years old. Plus, the money that you put into the 401(k) will compound quicker because of the tax-deferred growth.
Now granted, if you are trying to pay off debt at the moment, it might not be wisest to focus all of your attention on putting your savings into your nest egg—especially when your debt is accumulating interest and potentially dragging down your credit report. Still I would recommend putting aside a little bit each week or month regardless, so you have at least a light feathering for your nest egg. And when your debt is finally paid off, you’ll be happy to find that you are not high and dry but actually do have some stashed away.
DK loves writing about all things related to finance and enjoys surfing in his downtime. Check out his other work at RoadFish.com. Image credit.