How Do You Build a Nest Egg?

3 minute read

By Alexander Hamilton

A nest egg is money accumulated from saving and investing, typically earmarked for retirement. You might build a nest egg through an employer-sponsored retirement plan like a 401(k) or an individual plan such as an IRA. If you plan to use the money before retirement, for example, to buy a house, it may be in a taxable account.

Generally, a nest egg is money you aim to protect at all costs. It’s your financial security for when you are no longer working, or it’s the savings for achieving a dream—whether that’s a dream house, vacation, or car.

You can build a nest egg in many ways, but it’s essential to do so purposefully and carefully. Preserving the money you’ve accumulated is crucial to avoid losing it to poor investments. This doesn’t mean only investing in the least risky options, but it does mean carefully weighing your alternatives and balancing the risks.

Here are some key steps to follow when building your nest egg:

Tailor your account type to match how you intend to use the money:

Throughout your career, you may have access to various top retirement plans. Choose the account type that best aligns with your nest egg’s purpose.

Tailor your investment plan to align with your nest egg’s intended use and the timeline for needing the money:

No matter how you plan to use your funds, ensure your investment strategy aligns with your goals. Long-term goals typically benefit from aggressive investing, while short-term goals may necessitate more conservative investments.

Once you have money in your account, it’s important to keep contributing regularly. Consistent contributions help your account grow over time. A 401(k) makes saving easy by automatically withdrawing money from your paycheck before you even see it, helping you accumulate more funds.

Protecting your nest egg is crucial to ensure it’s there when you need it. If you’re saving for retirement, it’s essential to stick to your plan to enjoy a comfortable retirement. Resist the temptation to spend your nest egg on anything other than your intended goal.

Your nest egg’s biggest enemy is inflation. Over time, inflation reduces the purchasing power of your money. If your investments don’t outpace inflation, you’re effectively losing value in the long term, even if your account balance increases nominally.

Low-return investments like bonds, savings accounts, and CDs struggle to keep up with inflation, especially during periods of high inflation, such as in 2022. This is why owning stocks is essential for those looking to grow their nest egg, particularly if they have a long time horizon before needing the money.

A well-diversified stock portfolio offers the best chance to beat inflation over time. Stock prices are driven by the success of the underlying businesses, at least in the long term. However, stocks can be volatile in the short term. Investors should plan to hold their investments for an extended period, allowing them to weather market fluctuations.

If you want to maximize your nest egg and have decades to save, here’s how to prepare for retirement.

Since your nest egg is money saved for a specific purpose, it’s crucial to protect it carefully. For some, this might involve hiring a financial advisor who prioritizes your best interests to manage the funds. For others, it could mean personally overseeing and tracking investments to monitor your progress each month. Regardless of your approach, the key is to ensure your nest egg is secure and available when you need it.

Contributor

Tessa Thompson is a passionate writer with a keen eye for uncovering emerging trends and thought-provoking discussions. With a background in journalism and digital media, she has spent years crafting compelling content that informs and engages readers. Her expertise spans a variety of topics, from culture and technology to business and social movements, always delivering insightful perspectives with clarity and depth. When she's not writing, Tessa enjoys exploring new coffee shops, reading historical fiction, and hiking scenic trails in search of inspiration.