Saving is an important part of finances. Maybe that’s why parents encourage saving from an early age letting your kids put some of their gifts and extra lunch money in the cookie jar; or encouraging them to earn money with home childcare, tutoring, or mowing their neighbors’ lawns. This practice is considered financially healthy and continues throughout most of adult life. Of course, the older you are, the more forms and rules of saving they know each other, from the economic fund for emergencies to the nest egg. But, What is “nest egg” and what does it mean? Let’s see it!
What is nest egg and what does it mean?
A nest egg is a substantial sum of money or other assets that has been saved or invested for a specific purpose. These assets are generally used to achieve formulated long-term goals, the most common being a retirement or retirement, the purchase of a home and education.
This term can also refer to that amount of money that is kept aside as reserve to deal with any emergency, As the payment of unforeseen medical expenses or urgent home repairs.
The truth is the term “nest egg” has been used throughout history to refer to savings. In fact, we can find records of this concept as far back as the 17th century.
The term is believed to derive from the tactic of poultry farmers to lay eggs, both real and fake, in hens’ nests to induce them to lay even more eggs; a modality that raised the income of these merchants.
What is a good nest egg and how does it work?
The main purpose of setting aside some of the extra money to build a nest egg or savings fund is generally to preserve principal, as these funds have been built up over time. However, when you have a nest egg, it is important to opt for the idea of putting them in an investment portfolio that, preferably, has a growth component to offset the effects of inflation.
Perhaps that is why experts recommend that the best way to have a good nest egg is invest the money in relatively conservative instrumentssuch as certificates of deposit, mutual funds, bonds and premium securities that pay attractive dividends. The exact allocation of these securities should be based on the asset allocation principle as well as the investor’s risk tolerance and comfort level.
What is asset allocation?
Asset Allocation or allocation of assets is an investment strategy that seeks to balance risk and reward by distributing investments in a varied portfolio.
And what is risk tolerance? Risk tolerance -in English, Risk Tolerance- is the degree of variability that an investor is willing to put up with in their financial planning.
Watch out! It would be folly to invest savings earnings in highly volatile investment instruments in the hope of earning a higher rate of return.. These investments would include buying commodities on the stock market, buying small-cap stocks, and saving in a cryptocurrency; as their inherent volatility makes them more dangerous than the conservative investments we have already listed above.
The importance of having a nest egg
Saving a minimum of $1,000,000 in order to live comfortably in retirement has long been a financial goal for Americans. Reaching that sum, in theory, would allow the individual to support himself with the income and profits that his investments have generated throughout his life.
But nevertheless, taking into account annual inflation, that ideal size of the nest egg should increase as the purchasing power of the dollar decreases, and that is something that not everyone takes into account.
Important: In general, money from a nest egg should be invested in relatively conservative instruments, such as certificates of deposit, bonds and premiums that pay good dividends.
In addition to the cash and securities purchased, other assets that are expected to increase in value and potentially generate a positive return over time could be used to form part of the nest egg. An example? Gold, works of art, and other rare collectibles. These could perhaps be sold in the future for a figure much higher than their purchase price.
The real estate that are in a prime location could also be used as a good addition to the nest egg. As usual, These types of properties appreciate over time.. The proceeds from the sale of that asset or rental income would be a great way to receive money in retirement.
In short, what is and what does “nest egg” mean?
Before we say goodbye, let’s remember some important points from the article:
- A nest egg is a substantial sum of money or other assets – or a combination of both – that has been saved, invested or obtained through different methods for a specific purpose.
- These assets are generally used to achieve long-term goals, such as having a good retirement fund, covering the purchase of a home or paying for education.
- The ideal is to invest the nest egg in conservative instruments, such as certificates of deposit, bonds and securities with good ratings in terms of investment risk.