Many Americans struggle financially. In fact, a recent study by Bankrate found that more than half of millennials live paycheck to paycheck.
While there are many reasons for this, one of the factor is undoubtedly overspending. If you're one of those millennials who struggle to keep your spending in check, don't worry, you're not alone.
However, that doesn't mean you can't take steps to improve your financial situation. One way to do that is by creating a nest egg.
A nest egg is a term that many people use to describe their savings.
A nest egg is a personal finance term that refers to your savings. The term is derived from the idea of an egg’s nest, which is a place where eggs can be safely stored until they are ready to hatch. Similarly, it is where you can store your money until it's ready to be used.
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In other words, it is a sum of money that is saved for retirement or other long-term financial goals. It can be made up of any type of asset, including cash, stocks, bonds, and real estate. You can invest your nest egg to accelerate its growth over time via compounding.
A nest egg is important for several reasons. First, it can provide you with a cushion in case of an emergency. If you lose your job or an unexpected event occurs, having it will help you stay afloat financially.
Second, a nest egg can help you reach your long-term financial goals. Whether you're saving for retirement, a down payment on a house, or to cover your children's college expenses, investing your nest egg can make your goals more achievable.
Finally, a nest egg can help you to stay financially independent in retirement. It can be difficult to live off of a fixed income, as you can imagine. Having a nest egg that is invested properly will allow you to enjoy your retirement years without worrying about running out of money.
There are many common ways to build a nest egg. Here are five popular ways to do so:
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1. Establish a Retirement Account
Retirement accounts come with different pros and cons, and many of them have tax advantages which could include not paying taxes as the money grows in your account.
- 401(k) Retirement Plan: A 401(k) is a retirement account that allows employees to contribute pre-tax dollars from every paycheck. Funds invested in a 401(k) grow tax-deferred until withdrawal at retirement, which can help nest eggs grow faster than a traditional savings account or other types of investments.
- Traditional IRA: A self-funded retirement account that allows you to invest money before taxes. A traditional IRA is funded with before-tax dollars, but the contributions may be tax-deductible depending on your income.
- Roth IRA: A retirement account where contributions are made with after-tax dollars, but qualified withdrawals can be tax-free. This is another good way to build your nest egg.
Planning for your retirement early on will help you reach retirement at an age that you desire. To create your plan, think about what type of lifestyle you want in retirement and how much you'll need to get by.
This will help you to determine how much money you need to save on a monthly or yearly basis.
A retirement calculator can help you come up with these numbers.
3. Save As Much As You Can
One of the simplest ways to build a nest egg is to save as much of your paycheck as possible and consistently. Automating your savings by transferring a fixed percentage of each paycheck into a dedicated savings account is one way to do this.
Another option is to purchase high-yield, long-term certificates of deposit (CDs). This will provide you with a guaranteed return on your investment.
A budget is a key tool for saving money and building a nest egg over many years. By tracking your income and expenses, you can identify areas where you can cut back on spending and save more money each month.
This will help you reach your long-term financial goals, including saving for retirement. When it comes to saving for retirement, the earlier you start, the better as your money will have more time to grow.
Dave is a Certified Educator in Personal Finance (CEPF®) and is passionate about spreading financial literacy. He founded Clean Cut Finance in 2021 and has been featured on websites like Yahoo! Finance, MoneyGeeks, and GoBankingRates. In his spare time, Dave enjoys experimenting in the kitchen, racing simulation, and reading.