What Is a Nest Egg and What Are the Best Ways to Save?

A nest egg is a fund that you set aside for a specific purpose. Nest eggs can be large sums of cash that you store in a safe, retirement accounts like 401(k)s and IRAs, or investments like index funds and government bonds. 

Nest eggs are one of the best investments for long-term financial goals. This fund shouldn’t be touched until months or years into the future. Below, we’ll further break down what a nest egg is, how it works, and how you can contribute to it over time. We’ll also share helpful financial tools like Credit.com’s 401(k) calculator.

Key Takeaways: 

• Cash, savings accounts, and investments can all be a part of your nest egg.
• An FDIC-insured savings account protects up to $250,000  from losses.
• Once you reach age 59 ½, you can withdraw funds from retirement plans, like your 401(k) and IRA, without penalties.

What Can You Use a Nest Egg For?

Funds that you place in a nest egg can serve various purposes later in life. Some of the most common reasons people utilize this savings tool include:

• Family: A nest egg can cover costs if you have to go on unpaid family leave.
• Education: Saved funds can help you pay for your children’s education or your post-graduate studies.
• Rainy days: A nest egg can double as an emergency fund.
• Early retirement: Some people save money to retire before age 59 1/2
• Big purchases: Saving for a new car, a house, or a business expense.
• Inheritance: Here, investors gather their funds for the sake of their beneficiaries.
• Charity: The funds in your nest egg can help charities support numerous other people.

No matter your reason for building out your nest egg, knowing how to increase your funds is key. 

How to Build a Nest Egg?

You’ll need to set money aside to successfully create a nest egg over time. Savings accounts are excellent tools for storing future funds—especially high-yield savings accounts, which can generate a significant amount of interest based on your initial deposit and subsequent contributions. 

Effectively budgeting your funds is crucial to growing your nest egg, and you can do this in many different ways.

Set Clear and Realistic Goals

Creating savings milestones for yourself based on your current finances can help you steadily grow your nest egg over time. This process can be as simple as aiming to save $100 each month or as elaborate as saving to make a down payment on a home in 10 years.

Budget to Ensure Spending Aligns With Nest Egg Goals

Once you have a goal or series of goals in mind, you can adjust your spending habits to help you consistently meet those goals. For example, canceling subscriptions and eating out less can free up more funds to add to your nest egg.

The opposite is also true—once you know you’re regularly hitting your savings goals, you can treat yourself or donate extra funds with far less stress.

Leverage Savings Accounts With High Interest and Tax Advantages

High-yield savings accounts are excellent tools for safely storing funds and building interest long-term. These accounts protect up to $250,000 of your funds from losses via FDIC insurance. 

A 401(k) and an IRA can help you save for retirement while offering distinct tax advantages on your funds. Employers offer 401(k)s, and they’ll match a percentage of the money you contribute to this fund. This is why financial experts encourage you to maximize your 401(k) contributions if possible.

IRAs are individual retirement accounts that you contribute to on your own. Traditional IRAs offer tax-deferred growth (meaning, tax payments aren’t due until later), while ROTH IRAs offer tax-free growth for any after-tax dollars you contribute.

Adopt Better Debt Management Strategies

Debt limits the amount of money you can add to your nest egg, so making repayments now can lead to increased funds in the future. The avalanche method and the snowball method are two popular strategies to pay off debt fast.

With the avalanche method, you pay off your debts with the highest interest rates first and work your way down. The snowball method calls for a different approach: you tackle your debts in order from the smallest to the largest amount. 

Create a Diversified Investing Portfolio

When you diversify your investments, you create greater opportunities to build your wealth. For example, spreading your funds across a mixture of high-yield savings accounts, tax-advantaged accounts, stocks, bonds, and futures can potentially lead to a bigger return on investment than going all in on one type of account.

It’s important to manage your expectations when investing, as getting too ambitious can lead to big losses. It’s also pivotal to understand the risk involved with each account—stocks are more volatile than government bonds, for the most part.

How Much Should You Have in Your Nest Egg?

Everyone has different financial needs, so there’s no one-size-fits-all amount for nest eggs. Factors like your savings goal, location, and income all influence your unique needs. We recommend speaking with financial advisors to get the most accurate idea of your nest egg goal.

Even if you don’t yet have a specific goal in mind, you can always dedicate funds from each paycheck toward your nest egg. Using tools like a monthly budget template can help you get a better sense of your regular expenses and how much you can afford to save each month.

How Do You Protect a Nest Egg?

The methods for protecting a nest vary based on its form. FDIC insurance can protect a preset amount of the funds in your savings account in the event of a loss. For example, FDIC insurance protects up to $250,000 in a money market account,

Eliminating debts and increasing your financial knowledge will also help your nest egg in the long run. The fewer debts you have, the more money you can contribute to your savings goal—and knowledge will help you wisely allocate your funds.

To best protect your nest egg, watch out for get-rich-quick schemes that promise astronomical returns if you make an equally large investment. Lastly, set up alerts on your banking accounts to notify you about strange transactions.

Find Personal Finance Resources With Credit.com

Growing a nest egg is one of the more intuitive financial concepts out there, and it gets easier the more you know about money management. Check out Credit.com’s personal finance guide to deepen your understanding of methods for growing a nest egg and other investment strategies.