It can take a while to build up an emergency fund. Besides, you’ll probably need more than one. You need a “big” emergencies fund for things such as accidents, deaths, or job loss. But you also need a general “unexpected contingencies” fund for expenditures that aren’t family or life and death emergencies, but are nevertheless expenses you can’t avoid and come with a larger price tag. If you’re trying to build the former, wisdom is to keep at least 3-6 months worth of your salary aside. That’s a lot of money. What do you do until you have that in place?
One option is to keep aside a credit card (with zero balance) that you can use if something of that nature happens. A last minute flight or paying for funeral costs, for example (you can use your own judgment as to what would qualify for a fundamental emergency for you).
Another, more sustainable option is to maintain a healthy monthly dividend payout fund. If you invest in limited partnerships or income trusts and royalty funds, for example, you can have distributions deposited to your account on a monthly basis. In normal times you’ll use these for reinvestment and you’ll buy more dividend-paying stocks. But during times when you have an unexpected expense, you can count on receiving the dividend payout and just use that instead, not making an investment that month.
To be sure, it’s going to take a bit of money to come up with a significant amount of dividend payout, but the good thing about dividend stocks is that many of them increase over time, which helps.
And you’ll be killing two birds with one stone, because you’ll also be contributing to your own investment plan. It can’t be a registered account, because you want easy access to it. If you can keep it in your bank or linked to your bank account, all the better for easier access.
This is one of my plans currently. Rather than focus on “investing for retirement,” I’m investing in order to improve day-to-day living right now. If I know I can receive an extra $100/month through dividends (or distributions), I can invest that without having to tap into my usual income source. It also provides me with more flexibility in case I’m stuck over a credit card payment, late fee, fine (you never know!), or other unexpected expense. I know $100 isn’t much, but it’s $100 of extra flexibility and freedom, and it’s only going to increase from there.
You can do it too! Are you investing just for a rainy day or some “retirement” utopia years off into the future? You should think about investing for today. Invest for current cashflow. With the right investments, you can set yourself up so that one of your bills pays itself, or so that you don’t have to scramble to pay off your student loan each month. It can contribute to a car payment or a child’s education fund. And, of course, you can use it to slowly put in place your eventual emergency fund.
What do you think, do you have something similar in place? I’d love to hear about how you’ve done it and what the alternatives are.
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Outstanding way to look at investing for dividends and cash flow. Thanks for the perspective and by stopping by the site the other day.
Great idea. I would have never thought of investing in dividends. I agree that having an emergency fund is essential if you want to live a comfortable life. You just never know what is going to come up and having those funds is like a security blanket.