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January 17th, 2022 Read time: 15 min

What To Do With Your First Nest Egg

Note: I am neither a financial advisor nor an investment professional. I am merely detailing what I would do if I were in the situation I describe below. You are in charge of your own fate, and you should work with a professional if you have deeper questions.

I've had a few friends and family in recent months tell me that for the first time in their lives, they are sitting on several thousands of dollars of savings, and they're not sure what to do next. While this question is a personal one, the parameters to answer this are pretty consistent, so I thought I'd summarize my approach here.

First off, good for you! Earning and saving that much is a big accomplishment, and you should be proud. It's never too early nor too late to start thinking about how to work with your money, so good for you for taking the next step.

What follows is a rubric for thinking about what to do with this money now that you have it. Note, I'm not going to talk about what you do with income: that's a post for another day covering things like 401ks and the like. We're talking about a nest egg, and the goal is not 100% efficiency. Instead, we're looking at simple and easy to implement. A decent plan you can stick to is far better than a perfect plan you don't use.

Some Starting Assumptions

For the purposes of this exercise, I'm going to assume a few things:

  • You have a job and you're living within your means
  • You have a cash pile of $15,000
  • Your monthly expenses are $3,500
  • You have no major high interest debts (credit cards, student loans, etc.)

Your cash pile may be more or less, your expenses may vary, but the ideas should still apply.

Your first priority should be a basic emergency fund. This is money you've set aside to cover living expenses in the event of a job loss, or some other capital-E Emergency. Even if it's just 1-2 months of your expenses, make sure to save that much. If the thought of figuring out your monthly expenses is too much, try this: rent usually makes up 25%-50% of someone's monthly budget, depending on what kind of area they live in. So, multiply your rent by 2, and call that about 1 month's worth of expenses. Is that perfect? Of course not, and if you can make a better rough budget, you should. But we're not going to let perfect be the enemy of good, so we'll call that a decent estimate.

This emergency fund should stay in the form of cash somewhere. You don't want that emergency to roll around and have to sell something to get your cash out. Preferably this money is in a high yield savings account. What's a high yield saving's account? Typically an online focused bank will give better rates than institutions like Chase, Bank of America, or other older banks. Below is a link to some options out there: I'm personally a fan of Ally Bank myself1.

If you are looking to get a better view of your current financial standing, a tool I use and enjoy is Personal Capital (this is my personal link, we both get a bonus if you sign up with it). Personal Capital is a free-to-use aggregation software, much like Mint. However, they are much better than Mint in my book for a few reasons:

  1. I prefer their UI
  2. They aren't part of the Intuit family, a company that has allegedly made our tax code more and more cumbersome to their own benefit (so that you keep using their services)
  3. Their revenue stream is very clear: on Mint, it's not clear how they're selling your data. With Personal Capital, they're trying to get you to join with their wealth management tool, so selling your data to 3rd parties is not in their interest. Full disclosure, I recently signed up for their wealth management tool, but I preferred them over Mint well before I signed up

Why Investing Matters

Checking in on our math up above, I've assumed you've set aside ~$7,000 out of your $15,000 of cash. The question becomes what do we do with the remaining $8,000? While it would be understandable to keep all $15,000 as a larger emergency savings fund (a good rule of thumb is 3-6 months of expenses on hand in cash), I think it's important to have at least some exposure to the various markets out there. Here's why I think that:

  1. Hedge against inflation: even in a high interest savings account, your money is becoming less valuable over time due to inflation. A pizza this year will cost more than a pizza last year, but if your money isn't growing, then you'll have less pizza purchasing power as time goes on.
  2. Compound growth: the more time you give your money to grow, the more impactful that growth will be. Just because you didn't start yesterday is no reason to wait until tomorrow.
  3. Get used to investing: like anything, investing is a habit and a skill, and the more you practice it, the better you'll get at it. You don't want to wait for the perfect time to start, so get started now and develop those skills over time.

Of course investing comes with risks, and you should always apply a level of street smarts to any investments you hear about (if it sounds to good to be true, it probably is). That being said, there are some simple and affordable investments that should produce steady returns in the long run.

Where Should You Invest?

People will try and convince you and anyone who will listen that anything can be an investment (cough Beanie Babies cough). And while there are a number of potential investment classes to look at, the main three I think of are:

  1. The stock market
  2. Real estate
  3. Cryptocurrency (yes, cryptocurrency)

I am not suggesting that you invest in all of these equally, or that you even have to use all of them. If Bitcoin seems stupid to you, don't invest in it. I'm not going to proselytize here.

The question is, do you want to manage different accounts and reporting taxes and gains on each one year over year? In the grand scheme it's not that much work, but if you value not having to think about paperwork during tax season, then maybe only pick one of these investments. It's riskier from a diversification lens, but the important thing is going with what you value and are comfortable with.

Let's talk logistics though: what would it look like to invest in these asset classes?

The Stock Market

There is way too much information out there on the stock market, so I will keep this brief. You want to open up an account with a trusted online investment brokerage where you can buy and sell equities (stocks, ETFs, index funds, etc.) through their web application. The ones I've found most useful are Fidelity and TD Ameritrade, though there are plenty of other no-fee traders. A few points to remember (do further research on each of these points if you want to learn more):

  • Consistently beating the market as a whole is nearly impossible. I don't care how smart you think you are or how many times you've watched The Big Short, you will lose money. Do yourself a favor and buy ETFs and index funds
  • Depending on your income level, you may be able to invest your money in a Roth IRA (Individual Retirement Account). If you can, you should open that kind of account. It allows all of your gains to grow tax free, and you can put in $6,000 / year in 20222
  • In a non-retirement account, you pay taxes on any capital gains (your profit from a sale). So if you buy a stock at $25, sell it for $100, immediately buy another stock for $100 and then lose it all, the government doesn't care that you have no money: you technically made $75 worth of profit on that first sale, and you need to pay taxes on it. That's why I personally suggest only buying stocks you plan to hold for a long time and thinking through the taxes before you sell out of a position
  • Free trading platforms aren't really free, and some shady groups have come in (Robinhood is one I would avoid). One could argue that the older brokerage firms are also shady - they are - but I prefer my chances with the tried and true

Real Estate

I'll let you in on a secret: I'm a homeowner who's about to go back to renting. Why? Because owning your own property can sometimes suck. Maintenance and repairs can be hideously expensive, and when contractors are booked out 9+ months in advance and the city is backlogged on getting permits, it doesn't matter how handy you are, you're up the creek if you need to do some bigger work. Do I sound bitter? Too bad. Essentially, real estate is not as passive as you think.

Luckily, you don't need to buy your own house or storefront to invest in real estate. REITs (Real Estate Investment Trusts) allow you to invest in real estate similar to the stock market, and provide an easy way to get exposed to the market. Personally, I strongly recommend Fundrise: you give them money, they buy commercial real estate that most normal people don't have access to, you make money, and their advisory fees are quite small. If you use my link here, those advisory fees can be 0% for you for 90 days.

Cryptocurrency

I said I wasn't going to preach and I won't. Cryptocurrency can be a complicated and polarizing topic. The best recommendation I have is to find a reputable platform (Gemini and Coinbase come to mind), invest only amounts that you are totally fine may disappear, and only invest in the broadly established currencies, like Bitcoin and Ethereum. No shit-coins: you're way better off going to Vegas in that case.

Note, these are my personal links to Gemini and Coinbase: if you sign up using those links, we may both receive bonuses.

How Much Would I Invest in These?

Looking back at our scenario of $15,000 with $3,500 of monthly expenses, here would be my order of operations:

  1. $10,000 immediately into an emergency fund (I said at least $7,000 above, but 3-6 months of expenses is better). Landing it in a high yield savings account would be great if you can
  2. $5,000 invested across those three asset classes like so:
    • $3,500 into the stock market invested in ETFs like VOO, SPY, VTSAX, etc. (a Roth IRA if I qualify, a standard brokerage account if I don't)
    • $1,000 into Fundrise (here again is my link to Fundrise)
    • $500 into Bitcoin on Gemini or Coinbase (here again are my links to Gemini and Coinbase)

I would also set up recurring transfers into each of these accounts. Even if it's only $5 a month, having a recurring buy is so important to get you in the right mindset. If you earn a raise (or if you have a larger nest egg) I think it's fair game to raise those contribution rates and start investing more, but the important thing is to always have at least some of your money growing. Future you will thank you.

I hope this was helpful for you to see some concrete numbers and examples, and again, congratulations on taking these next steps.

  1. Bankrate's assessment of high interest savings accounts ↩

  2. Roth IRA rules and cut-offs ↩

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