Site icon The Fire Investor

It’s Nothing But a Nest Egg

a cute cat piggy bank in the middle of coins

Photo by Anna Tis on Pexels.com

Life is about relationships and time. Time is how we grow and cherish those relationships. Whether it’s our relationship with God, family or friends at the end of it all this is what matters in life. It’s not our career, money or fame. This begs the question how can we get more time to spend with the people that’s important to us when there are only 24 hours in a day. Well the only way to get it back it to buy it back. This is done by spending less time working and trading time for money. There are multiple ways to approach this. You can shoot for complete financial independence and save 25 times your yearly expenses which can seem like a daunting pursuit, but it can be done with tremendous discipline and sacrifice, or you could grow your nest egg slowly and use it as a store of value.

The thing is you don’t even need to save 25X your expenses to benefit from having a nest egg. A nest egg can buy back time no matter how small it is. It may only be able to buy back 6 months or less, but this is the beginning of buying back your freedom. Some people call this FU money, but its other name is a nest egg.

A nest egg is a significant sum of money an individual or family has saved or invested for a specific future goal. Everyone should have a nest egg no matter how young. There are so many platforms available now including acorn, stash and M1 finance, but no one is talking about what you can and should build with these platforms. You should be building a nest egg and it’s so easy to get started. All you need is just $1. You can even start one for a child. It’s called a UTMA or custodial brokerage account, but once again it’s nothing but a nest egg for them to continue to grow, nurture and use when they get older.

There are multiple ways to use your nest egg, but first lets go over some ground rules. Rule #1. Never sell all of your funds in your nest egg. Never Liquidate the account. Rule #2. Always nurture the account with consistent contributions no matter how small, but ideally you want to contribute more during a market correction or crash if you can. Rule #3. Always have a 3-6 month peace of mind fund so you don’t sell down your nest egg during a market correction or crash. The peace of mind fund offers just that. Peace of mind in case your nest egg gets demolished by a bear market or recession.

You can even use your nest egg to grow or replenish your peace of mind fund. If the market is doing well and near all time highs, you could tap up your peace of mind fund or expand your peace of mind fund from 6 months to a year of living expenses for example. All you have to do is sell some off the top with your nest egg. You could even sell some off the top and use the proceeds to diversify into Realestate like a lot of people were doing during the last market all time highs. That’s how a lot of those all cash offers were made.

You could also be flexible with your nest egg and use it to help and cover major expenses when the market is hot and near all time highs. In essence it can be used as a back up peace of mind fund when the timing is right.

The third way to use your nest egg is to try and grow it to 25X your expenses. In order to do this you would contribute at least 10% of your income to the nest egg. Those shooting for FI typically contribute close to 50% of their income or more, and hope to FIRE in about 10 years if the stock market gives them enough momentum through compounding and appreciation.

What investments should you have in your nest egg? The simplest path is to invest in a total stock market index fund like VTI. The second way would be to invest in 2 index funds; a total stock market index fund and a small cap value fund like VIOV. In doing so you would own the entire US stock market. The third way is to invest in Ian Dunlap’s recommendation of 2 tech companies and 2 index funds and the fourth is with Paul Merriman’s ultimate buy and hold portfolio which is composed of 10 index funds with a balanced international and domestic exposure. There is a slight increase in return with each additional fund with the ultimate buy and hold portfolio. M1 finance is probably the best brokerage if you want to own multiple funds with this portfolio.

You can also buy index funds at any valuation because of the ease of tax loss harvesting, but with individual stocks you should try to buy them when they are on sale. Try to aim for a price point below the 200 day SMA (simple moving average). 50% below the 200 day SMA is a typical starting clearance isle price point for fundamentally sound individual stocks with good moat, management and meaning. 25% below the 200 day SMA is a typical starting clearance isle price point for index funds.

The nest egg is a store of value. Everyone should have a nest egg just like everyone should strive to own their own home. Both the nest egg and personal home are stores of value. Your home will increase in value overtime and you can take that money out to retire with or use it for other purposes. It’s the same with an investment portfolio. It will go up in value over time and you can sell it down or borrow against it and use the proceeds to continue to build wealth.

Exit mobile version