A nest egg refers to a stash that you save for a future goal. It can be for a one-time expense such as a new car or vacation, an ongoing expenditure such as a house or college tuition, or for a lifetime’s worth of income such as retirement. The cash you need depends on the type of nest egg.
Retirement should be the time of your life when you no longer have to work and instead can travel the world, indulge in your hobbies or play with your grandkids. But this is only possible if you’ve contributed the cash you need into a retirement account. The amount you need to save depends on your current age, the age you expect to retire, what kind of lifestyle you lead, your life expectancy and the return on your investments. Because retirement income has so many variables, your best bet is to use one of the calculators listed by the Employee Benefit Research Institute. The organization also includes a Social Security calculator so you can figure that amount into your calculations. A good goal to shoot for is 85 percent of your yearly income from your working years.
For a one-time purchase, figuring the nest egg is a straightforward amount that you research on the Internet or by contacting retailers. For example, you may discover that the car you want costs $25,000. Decide when you want it and then figure out the number of pay periods you have until you reach that date. Divide the amount by the period and that’s how much you need to save from each paycheck to build that nest egg. For example, if you have 50 pay periods to go, dividing $25,000 by 50 means you must save $500 per period.
If you want to buy a home, think about the type of home that you want and how much it costs. You can find prices through local housing magazines, real estate websites like Zillow or through real estate agents. Then take a percentage of that total amount to discover your down payment, which is what you have to save. For example, if you want a $250,000 home, you can save 20 percent at $50,000, 10 percent at $25,000 or 5 percent at $12,500. The amount remaining on the purchase price is then financed with a mortgage, which means monthly payments over 15, 20 or 30 years. The lower the down payment, the higher the monthly payment.
Where to Save
Where to save your money depends on how far in the future you’re going to need your nest egg. If the timeline is short, such as a year or less, keep your savings in an insured bank account. You won’t earn much interest, if any, but you can’t lose your money because it’s insured by the government. For longer periods, consider CDs or certificates of deposit. In exchange for the higher interest rate, you can’t touch the dough. In the three-to-five year range or longer, bump up to mutual funds. You may lose your money but you stand to earn more than in banks. The investments are safer than investing in individual stocks because the funds spread the risk among several stocks. For long-term savings, such as for retirement, pick stocks because they have the highest potential for growth. You may lose money occasionally but over time, stocks outpace almost anything else and will recover your losses.
- Thomas Northcut/Photodisc/Getty Images
- How to Calculate the Present Value of a Growing Annuity Using the Future Value
- How to Build My Own Annuity
- How to Budget Biweekly
- How Much Money to Save & Invest?
- How Much Money Can I Withdraw from My IRA Monthly?
- How do I Create a Savings Budget?
- What Should Be Contained on a Budget?
- How to Earn in the Stock Market