For the third time, eligible Americans are receiving a stimulus check as part of the government’s efforts to strengthen the economy and alleviate financial burdens that many have endured throughout the COVID-19 pandemic. The latest payment of $1,400 is going to those who made $75,000 or less in 2019.
With the market frequently reaching new highs, it can be tempting to try your hand at investing that money. But are you ready to do so?
Any more pressing needs?
Before dropping your stimulus payment into the stock market, make sure you take care of other elements of your financial health. Have any unpaid bills? Pay them off. Credit card debt, a mortgage, car loan — all of them carry interest (or fees) that can eat away at your wealth-building efforts. A good rule of thumb is to compare the interest rates you’re paying to the long-term returns you’re likely to see in the market. The SPDR S&P 500 ETF Trust, for example, has averaged annual returns of 10% since its inception in 1993.
That credit card debt with an annual percentage rate (APR) of over 20% — you probably want to pay it off first. Meanwhile, your 30-year mortgage with a 3% interest rate can often wait. As someone who prefers a more conservative approach, I’d argue reducing your financial liabilities is always a step in the right direction.
Seeing as we are in the heart of tax season, it most certainly wouldn’t hurt to use your $1,400 stimulus check to pay any taxes you owe too. Is this a boring option? Yes, it is. But that doesn’t mean it’s a bad idea. Resist the temptation to spend your stimulus check on unnecessary purchases you wouldn’t be able to afford otherwise — skip the new golf clubs or PlayStation. Use it to help pay your tax bill, and say thank you to Uncle Sam for what basically amounted to a tax credit.
A rainy day
The next question is how financially prepared you are for the future. The stock market offers no guarantees, and as a result, you should never invest money you cannot afford to lose.
Before you go investing your $1,400 stimulus check into a risky asset like equities, make sure you can afford to survive financially if you encounter a financial disruption such as a job loss or major expense. That means having emergency funds set aside to cover your rent or mortgage and to pay for any other necessities.
If there’s one lesson everyone can take away from this past year, it’s the stark reminder of how quickly and unexpectedly things can go south.
If you’re going to invest, think long term
The Reddit craze that saw stocks like GameStop, AMC Entertainment, and BlackBerry surge in value resulted in a lot of buzz among retail investors. While it’s a positive development that more people are getting involved in the stock market, the more people understand investing, the better off they’ll be (“investing” being the key word).
Dumping money into headline-grabbing companies without a long-term strategy is less like investing and more like gambling. These short-term plays are too unpredictable to make up a wise investing strategy. For those new to the market in particular, if you’re going to invest your $1,400, you’re best off putting it into things like index funds. With the help of time and compounding returns, you can enjoy serious, sustainable gains.
The manner in which you invest matters
It’s tempting to just toss your cash into a traditional brokerage account and start trading, but you may not be making the most of it in terms of long term gains. If you’re going to invest your $1,400 stimulus check, consider taking advantage of the benefits offered by various retirement accounts. Put your capital into a Roth IRA, for example, and you can avoid paying taxes on your eventual withdrawals from the account. A traditional IRA can also help you grow your capital with benefits over a standard brokerage account, but for an already tax-free stimulus payment, it’s not quite as appealing as the Roth.
Another benefit of putting your stimulus check into a retirement account is you’ll be less tempted to simply spend it.
The pandemic brought the economy to a standstill, and Americans are still recovering from the fallout. Because these stimulus checks will not be a regular occurrence, you must be strategic in how you use the money.
Make the most of your $1,400 stimulus payment, whether that means reducing your debts, bolstering an emergency fund, or investing it. Even if you’re not in the position to put your check in the stock market, the other steps still serve as an investment in your future financial security.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.