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Should We Invest Our Emergency Fund in Dividend Paying Stocks?
The quick and simple answer is no. We are not planning to invest our emergency fund in stocks anytime soon. That isn’t to say that we couldn’t put a portion of our emergency fund into a few top notch dividend paying stocks. Just not the entire amount.
Our emergency fund (just under $50,000) is currently invested in several different certificate of deposit accounts that are set to expire throughout the year. Unfortunately, living in a low interest rate environment, I don’t feel our money is working as hard for us as it could be. That is why my wife and I have considered investing a portion of the money in dividend stocks instead.
Since we recently decided to invest larger sums of money like our tax return, it is at least worth looking into the possibility of investing our emergency fund.
Investing Our Emergency Fund
Here is a look at a scenario where we would invest all $50,000 of our emergency fund into the stock market.
Over the next 10 years, our dividend income (just from this investment) could look something like this –
Dividend Income – Next 10 Years
- Year #1 – $2,187.50
- Year #2 – $2,283.20
- Year #3 – $2,383.09
- Year #4 – $2,487.35
- Year #5 – $2,596.18
- Year #6 – $2,709.76
- Year #7 – $2,828.31
- Year #8 – $2,952.05
- Year #9 – $3,081.20
- Year #10 – $3,216.00
Note – The calculation assumes the dividend income is reinvested each year into additional stocks.
One quick thing that you may have noticed is that over the course of 10 years, the annual dividend only increased by just over $1,000. Based on the money invested, this may seem a little low.
The reason why the growth isn’t higher is that this is a one-time investment of $50,000. Unlike our tax return investments, there is not another $50K to invest next year or the next, etc. It is simply a one time lump sum investment that would not repeat year after year.
That being said, earning $3,000+ in dividend income 10 years from now is a nice chunk of extra income.
Dividend Stocks Versus Certificate of Deposits
The thought of generating an additional $2,100+ in dividend income next year sure is tempting. Added on to our current 12 month forward dividend income figure and we are pushing over $3,500 in potential dividend income for the year.
Investing that $50,000 would certainly give us a huge jump in dividend income. The only problem is that none of it would be guaranteed. Call me old school, but an emergency fund should be used for – emergencies. It should be accessible and readily available at all times.
While the funds in our emergency fund are tied up in various certificate of deposit accounts, there is a portion of the money available at all times. The rest of the funds are available throughout the year based on the expiration of the certificate of deposit they are invested in. In addition, all of the money is safe so there is no worries about losing any of it if the economy takes a hit.
On the downside however is that keeping our emergency fund in certificate of deposit accounts would generate only $375 in side income next year!
Over the next several weeks, my wife and I are going to look for a happy medium for what to do with this money. We plan to reevaluate how much money is absolutely necessary to keep in our emergency fund. That could be a portion of the current balance or maybe even the entire balance.
Once we figure out the funds that should be set aside strictly for an emergency, the remaining balance left over will likely be invested.
I think this approach is the best option overall. However, investing that entire $50,000 is sure tempting!
How much do you set aside for your emergency fund? How do you invest the money to keep it safe while providing the highest return?