In addition to the cash infusion many people see this time of year from a tax refund, we are also seeing the latest round of stimulus checks distributed across the country. If this stimulus is a little extra cash for you right now, rather than blowing this unplanned income on some shopping, check out these top 3 tips of what you can do with the cash to improve your financial situation:
Fortify Your Emergency Fund
The first place to consider putting your stimulus check is to simply use it to strengthen your emergency fund. First make sure you have at least 3 months of expenses in savings before going out and making other investments.
If you work in a potentially unstable industry or are retired – consider increasing your emergency fund to up to 6-12 months of expenses. Having a sufficient emergency fund can prevent you from being forced to sell your investments in a down market, running up credit cards, or having to pull money from somewhere that will result in an unnecessary tax bill.
Pay off Debt
Another good use for your stimulus check is to pay off debt. I recommend using a “debt avalanche” strategy. Make the minimum payments on all your loans and allocate any extra dollars towards your highest interest rate loan. Once your highest interest rate loan is paid off, begin using the same strategy with the next highest.
You may want to consider refinancing high interest debt into lower rates. If you have student loans, you should research first or consult with a Certified Financial Planner. Use this as an opportunity to save some money and create your plan to get out and stay out of debt.
Invest
The most frequent thing I’m asked is “What should I invest in?” For many, the right question really is “Should I be investing?
The only time it makes sense to begin looking at other investments is when:
- You have an ample emergency fund
- Your debt is under control and you either:
- Are debt free
- Your only debt is student loan debt, and you have written plan on paying them back or qualifying for loan forgiveness
When you have met the above criteria, it may make sense to invest any remaining funds, my general tips are:
- Consider your time horizon for the investment
- Consider your investment strategy in light of how comfortable you are with your accounts being down (risk tolerance)
- Keep your investing expenses and costs down – consider low cost index funds
- Invest in a diversified portfolio and minimize fees
- Remain tax aware with account types and trading strategies
If you’re not sure how to go about navigating these various aspects of your finances, consider hiring a fee-only, fiduciary, CERTIFIED FINANCIAL PLANNER™ professional to help.