Saving for Nest Eggs and Rainy Days

By Lawrence Carrel

Part of Investing in Dividends For Dummies Cheat Sheet

When you’re focused on the strategies involved in dividend investing, you might forgot about some of your basic financial needs. Everybody should have a little bit of saver in them so that they have some cash on hand to deal with necessities and emergencies. Try the following saving investment strategy:

  • Establish a six-month savings buffer — enough money to cover monthly expenses for six months in the event you lose your job. This buffer can help cover emergency bills, too; for example, if your house is damaged in a storm, you can pay for repairs immediately while waiting for the insurance company to process your claim.

  • Don’t invest money needed for short-term goals in long-term investments. Stocks and bonds are liquid — you can sell them on any business day and receive your money in three days. However, when you need the money may not coincide with the most opportune time to sell. You need to think of stocks as long-term investments; if you need to send a child to college or pay for a wedding in the next two years, don’t put that money in the stock market.

    If your stocks lose 40 to 50 percent of their value and you have to sell to pay for previously scheduled expenses, you not only won’t be able to recoup your losses but also may not have enough to cover the expenses. Remember, that six-month savings buffer could turn into a short-term need as well. The time many people lose their jobs and need cash occurs during or just after the stock market has posted serious declines. If your buffer is in the stock market, you may need to sell a lot more than you expect to cover the six months.

  • Invest the majority of your excess savings (anything above and beyond your six-month buffer) to maximize capital appreciation. Interest earned in safe investment vehicles, such as savings accounts, rarely keeps pace with inflation. To grow your money, you must invest it in something that holds a promise of higher returns.

  • Gradually move toward safer investments over time. As you age, your time frame shrinks, so capital appreciation begins to take a higher priority in your overall investment strategy.