Most Americans have an extra $1,400 headed their way, courtesy of a third round of stimulus checks. Stimulus payments, along with expanded unemployment benefits, have been a lifeline to millions of out-of-work Americans over the past year.
But many people who have received stimulus checks haven't lost income to the pandemic. Investing has been a popular way to put that money to use. In the week after the first round of $1,200 payments went out last April, trading platforms saw a 90% spike in activity among users with incomes between $35,000 and $75,000. If you're debating whether to invest your stimulus check, here are five signs you can afford to do so.
1. You don't have credit card debt.
On average, credit card debt costs you more than 16% in interest every year, whereas the S&P 500 index averages annual returns of about 10%. If you're carrying a balance, you'd save more money than you'd earn in the stock market during a typical year if you put that $1,400 toward paying it down.
2. You have an emergency fund.
Before you invest that stimulus check, calculate your emergency fund needs. If you have at least six months' worth of savings, you're in great shape to invest that check.
If you're in the three- to six-month zone, proceed cautiously. Three months' savings may be enough if you work in a stable industry and have solid health insurance but not so much if you're at risk of 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 instead of the stock market is a much safer bet.
3. You aren't expecting any big expenses.
An emergency fund protects you against the unexpected, but plenty of big expenses are completely predictable.
If you know you have a big expenditure coming up such as a wedding, surgery, or major home repair, consider setting your stimulus money aside instead of investing it. Doing so can help you avoid taking on debt or reducing your savings that are supposed to be reserved for emergencies.
4. You won't need the money in the next five years.
There's been lots of focus on short-term trading in the past year, but the most successful investors buy and hold for the long term. A common rule of thumb is that you should only invest money in the stock market if you won't need it in the next five years or more since the market can be volatile. Only invest if you can commit to staying invested for the long haul.
5. You aren't expecting 2020-level returns.
In April 2020, when the first round of stimulus payments of $1,200 went out, the stock market was still reeling from the pandemic-induced crash. Investing your stimulus check this time around will probably look very different.
Many investors scored huge returns by turning to stay-at-home companies like Zoom and Peloton, stocks that skyrocketed amid shutdowns but have since been cooling off. Or they invested in airlines and cruise companies at rock bottom.
Since the first $1,200 payments went out in the second week of April, the S&P 500 is up more than 40% as of this writing. Those results are anything but normal, so don't let 2020 skew your expectations.
The stock market is still the most reliable way to build wealth, but it requires time and patience. Only invest your stimulus check if you're OK with the fact that you're probably not going to get the eye-popping returns we saw in the past year.