Please ensure Javascript is enabled for purposes of website accessibility

Should You Invest Your $1,400 Stimulus Check?

By David Butler - Mar 27, 2021 at 9:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

With another round of stimulus checks already in the hands of millions of Americans, it can be tempting to try your hand at the stock market. The big question is: Should you?

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.

Stimulus Check and 1040 Tax Return

Image source: Getty Images.

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.

Person looking at stocks on laptop.

Image source: Getty Images.

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.

Be smart

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

BlackBerry Stock Quote
BlackBerry
BB
$6.57 (8.24%) $0.50
GameStop Corp. Stock Quote
GameStop Corp.
GME
$137.21 (6.81%) $8.75
SPDR S&P 500 ETF Trust Stock Quote
SPDR S&P 500 ETF Trust
SPY
$415.26 (2.46%) $9.95
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
AMC
$14.43 (17.99%) $2.20

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
344%
 
S&P 500 Returns
120%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.