The rhetoric changes almost daily. Will there be more stimulus or won’t there? Per the typical progression, the issue has become politicized between the two parties. While it seems to be agreed upon that further economic stimulus will be needed, the conflict is over the scale and focus of that money. President Trump has expressed a desire for a second stimulus check to be included in further stimulus legislation. One proposal recently put forth by a part of Congress called for two further direct stimulus payments pending economic developments.
Given that you’re reading The Motley Fool, one could guess that your first instinct is to invest any further stimulus checks. It sure is tempting, but there are a few things one should check off the list before tossing cash into the stock market.
1. Pay off debts
A great deal of stimulus and increased unemployment benefits were employed this year to counter the effects of the economic shutdown on business and labor. Still, the unemployment rate has not recovered to pre-COVID levels. If you’re one of the unlucky souls who has suffered through tough times, another stimulus check could be a great opportunity to clear up any credit card debts that may have been accumulated during layoffs.
It’s simple. You will never regret putting $1,200, or whatever the amount may be, away for a rainy day. If this tragic year has taught us anything, it’s that tough times do happen. Income can suddenly disappear. Having a few thousand dollars set aside for emergency essentials like food and household items is a plan that certainly will not backfire.
It’s also important to remember that while there is always potential to make your money work for you in the market, you can also lose money. That’s why you should most certainly have a bit of a cash nest egg set aside before thinking about investing in stocks or bonds.
3. Invest it
I have previously covered smart ways to use the first stimulus check. In doing so, I mentioned that it’s smart to take care of the essentials before putting money in the market. If you have things like food and debt taken care of, investing is the way to go.
If you’re new to the game, look to index funds — things that can track the market, like the iShares S&P 500 ETF (NYSEMKT:IVV). The fund carries a low expense ratio of 0.03%, has a 2.25% dividend, and provides diversified exposure to the market.
If you’re looking to bigger returns, you have to increase your risk levels. Buying individual stocks gives the opportunity for larger gains, but requires far more research and wherewithal. If you’re not a hedge fund manager, stick to the tried and true. Think blue chip stocks like Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), or even Berkshire Hathaway (NYSE:BRK-B).
Berkshire offers an in-between approach between the diversification of an ETF, and the investing prowess of Warren Buffett and his cohort. Berkshire has lagged the market a bit in recent years, but the company was sitting on nearly $147 billion at the end of August, and has made a few jumps on value plays this year. Looking past Buffett, the company still offers big appeal when you consider the insurance assets, slew of wholly owned subsidiaries, and financial ability to buy almost anything.
If you really want to get fancy, put your stimulus check into a Roth IRA. Withdrawals are never taxed, giving you a nice opportunity to boost your retirement.