With the fluctuating economy over the last decade, many people are still feeling insecure about saving. After all, many people lost hundreds or thousands of dollars when the American stock market crash brought down global markets.
Building a nest egg early in life can help cover unexpected expenses years down the road and can ensure a happy retirement. But how do you take that first step forward down the road of smart saving to build your nest egg for retirement?
Here are our four simple steps that you can focus on to build your nest egg
Step 1: Budgeting
The first step to building a nest egg is budgeting. By establishing a budget for your personal finances, you will better be able to understand how much money you are making, how much you spend, and where you spend it. This will help you highlight where overspending is taking place and how to address it.
If you buy a cup of coffee every morning on the way to work, for example, consider making coffee at home. By having an accurate view of income and expenses, you can make a more precise prediction of how much extra money you can set aside each month.
Step 2: Open an Investment Account
Once you have a reasonable estimate of how much money you can save each month, look into opening a brokerage account, IRA or other investment vehicle. While traditional savings accounts have a purpose, the return is quite low and there is not much to be made. Consider employing an independent wealth advisory firm or setting up a meeting with a financial custodian. By working with a professional, you can set up an asset allocation based on your projected future needs and risk tolerance.
If you don't know where to start, we put together a comprehensive comparison tool of the best brokerages for your money.
Step 3: Build An Emergency Fund
A common mistake people make in setting up savings is neglecting to acknowledge potential future expenses. A job relocation, car troubles or natural disaster could create an expensive financial situation. Homes, children and education can also be quite costly. Realize that the nest egg you start building in your twenties might be all but depleted by the time you’re in your mid-thirties. Be realistic about additional money you may need down the road and in planning for the future.
This conservative approach is also relevant to unavoidable expenses like taxes, and the influences of time, like inflation. Income tax rates in Australia are as high as 45% on the highest individual earners, a substantial portion of earned income. Inflation in Australia averages 2.7% over the past twenty years as well. This means that a hypothetical basket of goods and services in 1992 costing $100,000 would be cost $168,726 in 2012. These are important factors to keep in mind when anticipating future needs.
Step 4: Crafting a Strategy
With this in mind, a long term strategy is key. As any investment professional will tell you, a properly implemented investment approach is designed to withstand market fluctuations, periods of low prices and periods of high prices. Short-term volatility should not make you abandon a long-term investment strategy. Timing the markets, investing in trendy but dangerous securities or choosing to concentrate all investments in one area or asset class are not wise choices. Calculate investment in markets carefully, and look towards the future. When it comes to saving, keep your eyes on the future, not the present.
No matter what potential needs you anticipate, a conservative savings approach is a wise choice. Work towards maintaining a strict budget and realize that there will be unexpected expenses that you not only will have to pay for but must be accounted for in savings. Building a nest egg can take a lot of effort but by staying vigilant and establishing a long-term perspective on investments, the road to successful saving can be simple.
What other simple steps do you think are important to building a nest egg?