Secure Your Loved One’s Future With a Nest Egg

May 20, 2021
investment strategy

With the cost of living at an all-time high, today’s youth may face immense financial hardships as they make their way into the world.

A 2019 report shows that the federal minimum wage had 17% less purchasing power than in 2009 and 31% less than it did in 1968. At this rate, even an increase in the minimum wage may not be enough for young adults to pay for the essentials.

But by building a nest egg for your loved one’s future, you can give them the edge they need to follow their dreams without having to worry about being able to pay the bills.

This article will cover what exactly a nest egg is, how much you should aim to invest, and how to start building one for your loved one today.

What is a Nest Egg and How Does It Work?

The term “nest egg” comes from the 17th century, when farmers would put extra eggs in the nests of hens to try to get them to lay more eggs. More eggs meant more income for the farmers.

Although times have changed since then, the concept is still much the same. 

A nest egg today is often made up of a combination of liquid and non-liquid assets, such as cash, mutual funds, low-risk stocks, and other commodities.

Together, these assets form a growth-focused portfolio of funds that are built over time for long-term financial goals. Some examples of goals are financial freedom, education, retirement, or a combination of these.
Building a nest egg for a child or youth is a bit different than building one for yourself.

Typically, a custodian (such as a parent, guardian, or other loved one) controls the funds in the nest egg until the beneficiary (the child) reaches the age of maturity, which is 18 or 21, depending on the state. At that point, the child will gain full access to the account and can make withdrawals as they see fit.

With careful planning and thoughtful education, a nest egg can be a meaningful financial gift that lasts well into your loved one’s adult life.

Why You Should Build a Nest Egg for a Child

There are many perks to building a nest egg for the child in your life. Here are three main reasons why it’s worthwhile building one for a child, and why the earlier you start, the better. 

Financial literacy

Many people never learn how to handle their money. Or they learn it later in life, after making many adverse decisions. 

According to a 2020 report, Americans owed an average of nearly $6,000 in credit card debt, $215,655 in mortgage debt, and $25,483 in other debt.

One of the reasons for this is a lack of financial education. 

From a young age, children need to build a healthy relationship with money and learn how to handle their finances. A nest egg is a great opportunity to establish open communication with your loved ones and teach them about budgeting, saving, investing, and more.

The lessons you teach them now will impact them throughout their lives and help them make informed financial decisions for years. With sound financial literacy, they’ll be in a better position to achieve their dreams while building up to their own financial freedom.

Interested in learning more about what financial literacy is and why it matters? Check out this article.

Budgeting and financial literacy infographic
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Inflation and cost of living

Although the cost of living varies, an average young adult spends around $2,775 a month or $33,300 a year. 

However, most people in their early to mid-20s make around the same amount of money annually. This leaves little to no room for saving or investing.

Average monthly spending for young adults
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In addition, the average student debt (according to the Federal Reserve) is $32,731, with many young adults owing even more. 

Considering the rising cost of living and the challenge of finding a high-paying job early on, many people have financial difficulties.

A nest egg can help offset these costs, especially in the early years of their career.

Compound interest

One of the biggest advantages of starting a nest egg early is compound interest. 

Compound interest occurs when the interest gained from the principal amount is reinvested into an account to grow over time. This causes the original amount to increase, allowing the account to gain interest at a higher rate.

Here’s an example:

  • If you contribute $200 every month to an account with a compound interest rate of 3% for 20 years, the total contribution will be $48,200.
  • The total added compound interest is $16,650.
  • In 20 years, the account’s total will be $64,850.
(Image Source)

For a young adult, that money can go a long way. It could allow them to take a gap year, overcome financial hurdles, pay for college, etc.

Even if you start later, the monetary contributions will still grow over time. But, the earlier you start, the more powerful the impact of compounding will be.

Investing growth over time
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The Best Accounts for Building a Nest Egg

There are several options when it comes to building a nest egg for a child, including custodial accounts, trust funds, and custodial IRAs.

Custodial accounts

A custodial account is a savings account established at a brokerage company or financial institution by an adult for a minor. 

Two main types of custodial accounts exist: the UGMA (Uniform Gift to Minors Act) and the UTMA (Uniform Transfers to Minors Act).

Anyone who isn’t a minor can open a custodial account, including parents, grandparents, aunts, uncles, and family friends. 

Contributions are unlimited and can be done collectively for the sake of the child. A custodian assumes control over the account until the beneficiary reaches the age of maturity. At that point, the account is transferred over to the beneficiary, and they can use it as they wish.

There are a few key differences between the UGMA and UTMA. 

For example, a UGMA is often used to hold mutual funds, bonds, stocks, cash, and insurance policies. A UTMA, meanwhile, can also include real estate, art, and other assets that can be sold for a profit.

Opening a custodial account with EarlyBird is fast and easy. If you’re ready to start, check out our custodial brokerage account here. Or for more information on custodial accounts, check out this article.

Trusts

A trust fund is another great option for a nest egg. There are two types of trust funds: the revocable trust (aka living trust) and the irrevocable trust. Both options are used to hold and manage assets, but there are a few differences between them.

Revocable trust: This trust is flexible and can be adjusted after being set up. The owner can change or remove beneficiaries, create new rules regarding how assets are used, and more. 

However, the assets are subject to federal and state estate taxes. Creditors can also use them in case of debt collection.

Irrevocable trust: Nobody but the beneficiary can change this trust, except in extreme circumstances. It is more complex to set up, so an attorney is usually involved. 

This option may have certain tax benefits, and the assets are typically not taxable upon death of the benefactor.

Custodial IRAs

The Custodial Roth IRA and the Custodial Traditional IRA are both designed for early saving and investing. A custodian controls these accounts until the child is old enough to take over.

These accounts are growth-focused and benefit from compounding interest. They are also secure in that any contributions are irrevocable. 

Depending on the purpose of the savings, the child's earned income status, and potential tax ramifications, this account may be right for you. 

But, if you’re looking to start a nest egg for a young child, this type of account won’t be an option — the beneficiary of a Custodial IRA must have their own earned income for anyone to contribute to their IRA. 

On the other hand, if your loved one is already a teenager with a part-time job, this type of account might work for setting aside some money for their retirement. Read more about investing for teens here

Things to Consider When Building a Child’s Nest Egg

As you get ready to build a nest egg for your loved one, here are some things to consider.

Account ownership

There are several advantages to building a nest egg and opening an account in a minor’s name rather than your own. 

Not only is a percentage of the capital gains (profits gained from selling the assets) taxed at a lower rate, but the child may also be more engaged in the whole process, knowing the money is theirs and cannot be taken away. 

This can help the custodian and other contributors to educate the minor in money management before handing over control of the account.

Taxes

Different types of accounts come with different tax advantages and requirements. Consider the merits and potential tax impacts of all your options before opening an account.

Keep in mind that minors and college students under the age of 25 can file as dependents under their parent or legal guardian. 

This allows them to gain “unearned income” at a lower tax rate. Once the minor files taxes independently, they are taxed on their own income bracket.

Portfolio diversity

Having a diverse portfolio can help mitigate risk and maximize gains over time. A diversified, well-managed portfolio typically performs more consistently than one that emphasizes one type of asset or equity too much.

Generally, the higher the risk, the higher the potential returns and the higher the chance of losing it all. 

That's why many people opt for a well-balanced portfolio, spread across different companies, industries, asset types, and even countries. 

Diversified portfolio, moderately aggressive

Timing and purpose

Depending on the purpose of the nest egg, you may want to consider a custodial account, a custodial IRA, or a trust fund. 

Custodial accounts and trust funds can be used for nearly any reason, whereas IRA accounts are for retirement purposes. Each type has its advantages and drawbacks.

As we’ve discussed, the longer money is in the account, the more it will grow. But, when you’re considering a nest egg for a child, their retirement probably feels very far away.

If you want them to be able to take advantage of the money when they’re still a young adult, choosing a custodial account or trust is the way to go. 

You can still harness the power of compound interest by starting their nest egg as early as possible.

Investing early vs. later, cost of waiting
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Ability to invest regularly

Before you select a type of account and set up a nest egg for your loved one, ask yourself the following questions:

  • Can you build the nest egg over time, or are contributions limited?
  • How much can you contribute, and how often?
  • Can others easily invest in the account?
  • Does your account allow you to set up automatic contributions?

EarlyBird offers automated, collective investing to make sure you and others can easily invest each month without even having to think about it.

How to Build a Nest Egg for a Child

Now that you know what factors to consider, are you ready to build a nest egg? Here’s how to get started.

Calculate a budget and end goal

Decide how much you can contribute based on your income. 

Calculate fixed and non-fixed expenses in your life. Be sure to set aside enough for emergencies and your own future.

Then consider who else might be able to contribute and how often. 

Next, set a goal for the account. Asking yourself how much you want to be in the account and how much risk you can handle can also help you make the right decision on the type of account you open.

Select the right account

Now it’s time to decide which type of account is best for your loved one’s nest egg. If you’re not sure yet, go back through the account descriptions and factors to consider above. 

Here’s a quick recap:

  • Custodial accounts are flexible enough to use for anything the child desires when they come of age, the assets belong to the child, and there are no contribution limits.
  • Trusts can be set up almost any way you want, but the complexity will likely require legal advice and support. Once an irrevocable trust is set up, it is very difficult to change. 
  • Custodial IRAs are an attractive way to save for a child’s retirement, but the child must be earning income for you to contribute. 

Set up the account

Once you know the type of account, it’s time to pick a broker, institution, or platform and set up the actual account. 

If using EarlyBird, simply download the app, input some information, and start contributing today.

Spread the word

Ask other family members and close friends if they want to contribute as well. 

Even an extra $100 will go a long way with time and compounding interest. 

Then, let your collective investments grow until the time comes to transfer the account to your loved one.

Bottom Line

It’s never too early (or too late) to start saving and investing in your loved one’s future. 

No matter how big or small, a nest egg is such an indispensable gift for a child. Along with preparing them for a financially stable future of saving and investing, it'll encourage them to pursue their dreams without being held back by bills and debt. 
Want to start a nest egg for your loved one today? Download the EarlyBird app.