Dividends are awesome. I love them. They are the best thing to come along since compound interest. I love being able to wake up and see that money came into my bank account while I slept, without me doing anything at all but live my life.

As cool as dividends are, I also believe money needs to be useful. It needs to serve a purpose. I like to think of it as "putting it to work". I rarely think in terms of "spending" money, even though I spend it just like everybody else does, I just like to re-frame it in my mind. I like to believe every dollar I use is serving a definite purpose. Sometimes. It's purpose is a mundane thing like food, which is keeping me alive. Other times, it is a sophisticated as "making my dreams come true', like when I invest for the long term.

So to simplify it, I like to maintain a balanced approach to money and its purposes.

The old argument of "should I pay off debt or invest" is constantly nagging at us all. I am no exception. I have bills to pay, and financial aspirations to fund. I want to do both. So I make a conscious effort to nurture both "purposes".

The plan

I am a simple man, so I have a simple plan. (Hey! That rhymed!)

Every year I figure out how much I am going to earn from dividends over the next 12 months. I then take that amount and split it in 2. Very simple.

I take half of my projected dividends and I re-invest in more dividend bearing stock. I take the other half and I give it to my wife. She then uses this money for all of our everyday needs. Mostly we use it for a vacation fund, and the feeling of going on a fully-funded vacation that is not putting us in debt or infringing upon our regular everyday expenses is awesome. It is a guilt free experience.

Of course, the benefit of this plan is that it is predictable. Each year the amount of dividends we earn goes up, and so our 50/50 split does too. We are investing more each year and spending more too. It is a win/win. I am being sensible and enjoying life at the same time. Plus, this is all happening with money that I didn't have to trade my time for.

The nitty gritty

Every year, when I calculate our impending dividend payments, I borrow that amount from our margin account. I then buy shares with half (within the margin account) and I put the rest on our credit card. The dividends then pay off the margin account over the year. The interest on the loan is covered too, as it all comes out of the same account and the additional shares I bought cover much of the interest. My calculations are based on last years yield. If any of my blue-chip friends decide to give me a raise (which they regularly do) it all goes better. The loan gets paid off sooner and the next year gets re-calculated with the new numbers. It almost never gets worse..

I, of course, am contributing to the margin account from my other earned money so I am paying back the loan a lot quicker than 12 months, but in the event my earned income is interrupted for any reason, the margin loan is always paid back.

You may remember that I mentioned putting half on our credit card. This is because we pay for EVERYTHING with our credit card. This way we earn an obscene number of "points" every year and we use them to fund our vacations. We love to travel, so this helps us live the life of our dreams without having to come up with the cash. I am not concerned with the interest we pay on the credit card because dividends are paying for it. No harm no foul.

Now if you are just starting out or enjoy a less affluent lifestyle, you can always change up your ratio of investing to credit card debt. You may want to invest 80% of your dividends to new investments and only 20% to debt. Its up to you. You may be buried under a mountain of debt and use 80% for that. Not a problem. I suggest you make whatever decisions work for your circumstances, but I really would encourage you to always put SOME into the investment side. The only way you are going to grow your system is by contributing to it. Even if it is just 10%, you will still see the benefits over time. As soon as you neglect your portfolio, you will have stalled. Keep the momentum, even if it is just a pittance. The habit will eventually become a way of life and you will never regret it.

If you want to learn more about my investing strategies and some cool ways to manage money, then treat yourself to one of my books or even my online training. I look forward to seeing your progress!

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