6 Tips For Creating a Successful Nest Egg
Whatever it is that you're planning to save for—a new home down the road or a trip around the world when you retire, perhaps—now's the time to start putting the money away. Sure, it's easy to come up with a million different ways to spend it, but creating a nest egg is difficult, right? Not necessarily. We enlisted the help of Manisha Thakor, Director of Wealth Strategies for Women at Buckingham & The BAM Alliance, to find out the simplest and most successful ways to save money for the future. Check out her tips below:
Follow the 50/30/20 rule.
“The recipe for financial disaster is spending more than you earn," says Thakor. “Yet without some sort of guidepost to help you know what is reasonable to spend where, it's all too easy to do just that." Thakor follows a rule that Senator Elizabeth Warren wrote when she was a bankruptcy professor at Harvard Law School. “It says that roughly 50 percent of your income should go to needs, 30 percent to wants, and 20 percent to savings. Yes! 20 percent to savings." Of course, if you have debt, that 20 percent should be used to pay it down. But think of it this way: you'll at least be saving money on interest.
Experiment with joy-based budgeting.
Thakor has an exercise that helps people cut back on spending without reducing their life joy. We're listening… “The way it works is that for a month you commit to writing down every single thing you spend money on," she says. “At the end of the month, instead of tallying up the numbers and judging yourself, you simply take out a yellow highlighter and identify anything you spend money on that did not make your heart sing." Obviously rent and the electric bill might not fit this category, but for things like a membership you rarely use or cable you never watch, it can add up. “By using joy as your initial measuring stick when rejiggering your spending, you may be surprised at what you can find to cut back on [and put into savings]."
Take advantage of your employer's 401K match.
“If you're lucky enough to have a 401k or other employer based retirement plan that offers a match, you always want to make sure you are contributing to the point of the match," Thakor says. So, for every dollar you put in up to a certain amount, your employer will contribute another $0.50 or even $1. “Another way to look at that money is it is a guaranteed 50 or 100 percent return. There is no stock on the planet where you can get a guaranteed return," she says. “So this is an incredibly good deal that you absolutely want to take advantage of. It's literally free money."
Take a chance with stocks.
If you're looking to save in long-term investments, make sure you have a good mix of stocks and bonds for your stage in life. “A good rule of thumb is 110 - your age = the percent of your portfolio to put in stocks," she says. So, if you're 25 years old, you'd subtract that number from 110 to get 85. That means, you'd want to have 85 percent of your retirement assets in stocks. “The logic is this is money you won't be touching for decades so you can afford to play the three steps forwards, one step back dance that stocks do on their meandering march forward," she says. “Your 401k is a classic example of long-term investments."
Consider a Roth IRA.
If you don't have a 401K (and even if you do), you can contribute to an IRA. “If you qualify, a Roth is a great deal because while the money contributed is after-tax, once that money goes into the account it is never, ever taxed again," Thakor says. “Fifty years from now, you will be totally high-fiving yourself for this move."
Set aside an emergency fund.
While putting money away in stocks and bonds is smart for the future, you should have some money set aside that you can access in an emergency. The goal is to have enough in your savings that will cover three to six months of living expenses. While that will take some time to get there, Thakor advises to have a least $2,000 when you're starting out. “The reason for this is that $2,000 is, according to the Consumer Federation of America, the average amount of unexpected expenses typically experienced in a year (think flat tire, plane ticket to see sick relative, etc.)," she says. “When a true emergency comes up and you are forced to spend that, clamp down on your 'want' spending for a while until you can build it back up."
Have you started saving for your nest egg? Tell us what's worked for you in a comment below!