One of the most important things you can do for your personal financial situation is to build up an emergency fund. An emergency fund can provide you with a source of money when you run into tough economic times. Having stable cash flow with dividends can also be helpful, but you might not have built up enough to cover all of your expenses. Until you reach a point where your dividend earnings can cover your income needs, it is important to have a back up plan in the form of an emergency fund. Honestly, you should have an emergency fund anyway – just in case your dividends are cut.
Using Dividend Earnings to Pad Your Emergency Fund
One way you can help build up an emergency fund, without taking as much money away from other things you find important, is to use the money from your dividends. When you start building up an income portfolio using dividend stocks, you are unlikely to earn a great deal at first. You can divert some of those earnings (or even all of them) into your emergency fund. This will help you pad your emergency fund while, at the same time, helping you develop your income stream from monthly dividends.
If you lose your job, or suffer some other financial catastrophe, the money you have build up in your emergency fund will help you meet your expenses. And, because you have been building an income portfolio during that time, you will also have a cultivated source of dividends income. This may not completely replace the income that you had, but it will help immensely as you look for other sources of cash flow.
You can maximize your emergency fund by keeping it in a high yield savings account, or developing a CD ladder. While the interest you earn from these types of savings products will not be great, it will still often beat what you would get with a traditional savings account. There are other types of accounts you can consider for your emergency fund, including interest bearing checking accounts and some types of bond funds. (There are some bond funds, like GNMA, that allow you to write checks.) However, you need to be careful since bond funds will not be FDIC protected. One of the points of having an emergency fund is that it is accessible and it is protected so that you get your money back if something happens to the financial institution.
Your dividend earnings can be a great way to fund an emergency savings account. Dividend earnings represent a regular source of income, and can be used to help you improve your financial stability.