If you're like most Americans, you've already received COVID-19 stimulus money or will be getting it soon. Valued at $1,200 per qualifying adult and $500 per eligible dependent, your coronavirus payment could help you grow your wealth -- if you invest it.
But while the stock market volatility caused by COVID-19 presents some great buying opportunities, putting your money into the market isn't the right choice for everyone. If you're considering investing your stimulus money, you must ask yourself these three essential questions first.
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1. How big is your emergency fund?
Financial security starts with an emergency fund, even in the best of times. A job loss, unexpected medical bills, or other surprise expenses can have catastrophic financial consequences if you don't have the funds to cover them.
Unfortunately, millions of Americans live without the recommended three to six months of emergency savings. If you're one of them, using your coronavirus stimulus money to save for surprise expenses could leave you far more prepared for life's uncertainties.
Even if you think you're financially secure right now, the long-term fallout of coronavirus remains unknown. Do yourself a favor and prepare for the worst by putting your money into a high-yield savings account where it's accessible if you need it.
2. Will you need the money in the next five years?
The stock market has historically produced around a 7% annual return -- but remember that's an average. In some years, the market may go down substantially, while in other years you may see much more impressive gains.
Because you never know when stocks will hit rock bottom or when a recovery will begin, investing money you'll soon need is a high-risk strategy. If you invest in a volatile market and it turns out you need the cash next month, you could end up locking in losses if you're forced to sell during a downturn.
If you can stick it out for five years and you've made sound investment choices, chances are good you'll be able to walk away with at least some gains when you need to cash out. You need to make sure you can give yourself that time to reduce your risk.
3. Do you have a sound investment strategy?
When "black swan" events such as the coronavirus happen, it seems like an opportunity to make a quick buck. Unfortunately, buying with the hope of short-term gains is usually a recipe for disaster, as get-rich-quick plans are rarely well thought out and often don't pay off.
If you have a comprehensive plan for your portfolio, take your time to research investments, and purchase assets you plan to hold over the long term, there's a good chance you'll more than double your stimulus funds over time.
But if you think you can double your stimulus money by next year because you're buying based on rumors about coronavirus drugs or vaccines, you'll probably waste the funds the government has given you.
Invest your coronavirus stimulus check only if it makes sense for you
Coronavirus stimulus payments can help you become more financially secure, but you need to make smart choices about what to do with the money. The right decision about whether to invest will depend on your answers to these three questions, so take the time to think about them before you jump in.
