Where there is no vision, the people perish.
– Proverbs 29:18

Let’s look at a couple of definitions from dictionary.com:

vi·sion [vizh-uhn] : the act or power of anticipating that which will or may come to be
plan [plan] : a scheme or method of acting, doing, proceeding, making, etc., developed in advance

A vision is taking the time to think of (anticipate) in detail what the future will bring. You would need to consider future earnings, savings and economic issues such as inflation. Then based on what you foresee in the future, you would formulate an action plan to ensure the best possible outcome given your unique circumstances. You can’t have a retirement plan until you have a retirement vision. It would seem to me that there are a lot or retirement plans out there but very few retirement visions.

Many people are putting money into various retirement vehicles, but they haven’t taken the time to envision how it is all going to come together and ultimately if it will be enough. Unfortunately, a significant number of people are not even taking advantage of tools at their disposal. It was noted in a March 2006 CNNmoney article “Retirement: Ready or not? Not, apparently” that

only about 60 percent of workers over 40 who are eligible to participate in their 401(k)s do, and the number of workers covered by a defined-benefit pension has steadily declined. Meanwhile, young workers have the lowest 401(k) participation rates of all workers under 65.

A portion of my retirement planning includes dividend investing. One of the beauties of dividend investing is it provides you continuous feedback. As the years and decades go by you can see your earnings steadily grow as you invest your money in dividend stocks. When you hit retirement it is not that drastic change that many people fear. You have spent a lifetime preparing for it.

Time is only your friend, if you enlist him early. Wait too long and he can be formidable adversary.

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So, back to the title question. What’s more powerful than compound interest, faster than an tax audit and able to leap a 1099* in a single bound? Compound Dividends!

Compound dividends are like compound interest on steroids, simile speaking, of course. Let’s continue the above example and assume that instead of depositing money in an interest-bearing account, you instead purchase good dividend stock with a current yield of 5%. So, in the first year you will earn $5. Which is the same as the 5% interest-bearing account, but that is where the similarities end. Good dividend stocks increase their dividends each year. In this example, let’s assume a 10% dividend growth rate. So you will earn $5.78 in year 2, $6.71 in year 3, $7.81 in year 4, $9.17 in year 5, and so on.

Comparing the above two scenarios over the 5-year period, you will earn $27.63 from the interest-bearing account as compared to $37.47 from the dividend stock. That is more than a 35% increase!

Can life get any better than this? Yes it can! Good dividend stocks’ yield tends to stay within a given range, so if dividends are increasing each year, the only way to keep a consistent yield is for the price of the stock to go up. In order to have a 5% yield in our above example at the end of year 5, the stock would have to be worth $183.44 (9.17/183.44 = 5%).

Dividend compounding, it doesn’t get much better than that!

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* A 1099 is the U.S. tax form used to report non-wage income from things such as interest, dividends and miscellaneous earnings.

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A: An emergency fund is easily accessible cash to be used only in case of emergency. As defined by the American Heritage Dictionary.

e·mer·gen·cy: 1. A serious situation or occurrence that happens unexpectedly and demands immediate action. 2. A condition of urgent need for action or assistance: a state of emergency

Note: There is no mention of a better vacation, nicer car, home renovations, and other things we are apt to spend the emergency fund on.
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Q: I would like to get starting investing now, can I use my investments as my emergency fund?

A: No, you don’t want to do that. Dividend investing is about buying good solid investments and holding them long-term (if not forever). If you are relying on your dividend investments as an emergency fund you may be forced to sell when the stocks are at their lowest. For example, the country goes into a recession, the stock market tanks, you are laid off from your job, you must then sell your stocks at record lows to feed your family.
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Q: How much should I have in an emergency fund?

A: The textbook answer is 4-6 months, and I don’t disagree with that. In my case, I have 4 months since I could easily make lifestyle changes and extend the funds well beyond 6 months. You need to review your own situation and make that determination.
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Q: Where should I keep my emergency fund?

A: It should be readily accessible. A portion of it should be immediately accessible via check. My emergency fund is spread between high-yield online money market accounts, such as AmTrust and ING, and a portion of it is kept in an account that allows me to write checks. Currently, I am using Capital One as the account that allows me to write checks. Ironically, it is paying one of the highest rates, so I have my entire emergency fund there.
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You wouldn’t want to buy or live in a house with cracks in its foundation. You need to make sure your financial house is built on a solid 4-6 month emergency fund.

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All the above have something in common – there is a chance of success, albeit very small in several of them. The most dangerous investment has zero chance of success. It is simply not investing at all. I do not consider money market accounts (MMAs) and CDs as investing; they are just another form of cash. With MMAs and CDs your best case scenario would likely be to keep up with inflation.

Before investing, here are some things you should consider:

1. Do your homework before turning over your money. If you entrust your money to someone else, make sure they are a licensed and registered investment professional. In the U.S. you can use BrokerCheck to check the background of your investment professional.
2. Understand what you are investing in. If someone can’t explain the investment where you quickly and completely understand how it works, then you should not be investing in it.
3. Make sure the investment meets your needs. Understanding an investment is not enough. I understand how a lot of investments work, most of which I would never invest in because they are outside of my defined long-term strategy.
4. Diversify based on a sound asset allocation model. Never put all your eggs in one basket. Spread your risk among different industries, companies (size and type), and kinds of investments. Never invest more in any one security than you can afford to lose.

The U.S. Securities and Exchange Commission (S.E.C.) has a wealth of information for investors. One item you may find useful is “Questions You Should Ask About Your Investments“. It is not only good for new investors, but also is a good reminder for those of us who have been around the block a couple of times.

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