MMost Americans have an extra $1,400 available to them, thanks to a third round of stimulus checks. Stimulus payments, along with expanded unemployment benefits, have been a lifeline for millions of jobless Americans over the past year.
But many people who received stimulus checks have not lost income due to the pandemic. Investing has been a popular way to use this money. In the week following the first round of $1,200 payouts last April, trading platforms saw a 90% increase in activity from users with incomes between $35,000 and $75,000. If you’re wondering whether to invest your stimulus check, here are five signs you can afford to.
1. You have no credit card debt.
On average, credit card debt is costing you more than 16% in interest each year, while S&P500 index average annual returns of around 10%. If you have a balance, you’ll save more money than you would earn in the stock market in a typical year if you used that $1,400 to pay it off.
2. You have an emergency fund.
Before investing this stimulus check, calculate your emergency fund needs. If you have at least six months of savings, you’re in excellent shape to invest that check.
If you’re in the three to six month zone, proceed with caution. Three months of savings may be enough if you work in a stable industry and have solid health insurance, but not so much if you risk losing your job or your income is irregular. If you don’t have at least three months of savings, putting that $1,400 in the bank rather than the stock market is a much safer bet.
3. You don’t expect big expenses.
An emergency fund protects you against the unexpected, but many big expenses are completely predictable.
If you know you have a big expense coming up, like a wedding, surgery, or major home repairs, consider setting aside your stimulus money instead of investing it. This can save you from going into debt or reducing your savings that are supposed to be reserved for emergencies.
4. You won’t need the money for the next five years.
Much of the focus has been on short-term trading over the past year, but the most successful investors buy and hold for the long term. A general rule is that you should only invest money in the stock market if you won’t need it in the next five years or more, as the market can be volatile. Only invest if you can commit to staying invested for the long term.
5. You don’t expect 2020-level returns.
In April 2020, when the first round of stimulus payments of $1,200 were disbursed, the stock market was still reeling from the crash caused by the pandemic. Investing your stimulus check this time around will likely be very different.
Many investors have obtained huge returns by turning to stay-at-home businesses like Zoom and Platoon, stocks that soared amid the shutdowns but have since cooled. Or they have invested in airlines and cruise lines at rock bottom.
Since the first payments of $1,200 were made in the second week of April, the S&P 500 is up more than 40% at the time of this writing. These results are anything but normal, so don’t let 2020 skew your expectations.
The stock market remains the most reliable way to build wealth, but it takes time and patience. Only invest your stimulus check if you’re okay with the fact that you probably won’t get the eye-popping returns we saw last year.
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