On Friday, March 27, a $2 trillion stimulus package was signed into law. I’m guessing you’ve already looked into the stimulus package and you know whether you’re eligible to receive any money.
I wouldn’t be surprised if you’ve already whipped out your trusty calculator and crunched the numbers to determine how much money you’re going to collect. But, have you also researched what you should do with the money after you receive it?
Just to be clear: I’m not talking about researching whether you should use the money to pay your mortgage, to pay your utility bills, or to keep your business afloat.
I hope it goes without saying that those are obvious things you should spend the money on. What I’m talking about is what you should do with the money when you don’t have any obvious/practical ways to spend it - when you view this money as a windfall.
If you’re doing well financially despite the current conditions, and if you view the money as somewhat of a windfall, you need to think about what you’re going to do with that money. And I’ve got some ideas for you! First off: I do NOT recommend that you go and spend it on designer handbags or clothes. In fact, I don’t recommend that you spend it at all!
If you’re viewing this money as a cool extra paycheck, I recommend that you use this money to (in this order): 1) build up your emergency fund; 2) pay off high interest debt; or 3) invest in the stock market, real estate or a business. Why this order? Why am I not recommending that you just invest all that money? Isn’t that the best way to grow it?
First, investing is long-term.
You never want to invest money that you might need in the near future. Markets are volatile. If you invest your money in the market and the market tanks, and then you need money for an emergency, you don’t want to have to pull out your invested money at a loss. This is why having an adequate emergency fund is necessary - it keeps you from having to pull from your investments at a loss when your investments aren’t doing well.
Second, when you invest, your returns are never guaranteed.
In fact, you could invest and actually lose money. On the other hand, your high interest debt is guaranteed to continue to compound and grow until you pay it off. Think of it this way: You’ll get a better guaranteed return by paying off high interest debt than you would by investing in the stock market, real estate or a business. So pay off high interest debt before you invest.
Finally, let’s circle back to the topic of emergency funds.
Not to be a Debbie Downer, but our economy is getting battered. More than nine million Americans have filed for unemployment in the last two weeks alone - that’s more unemployment claims in the past two weeks than was filed over the past ten months. People that never expected to lose their jobs are finding themselves unemployed; businesses are shutting down overnight; and people are being forced to self-isolate. We are all dealing with a period of uncertainty. To help protect against this uncertainty, make sure your emergency fund is padded.
Of course, padding up your emergency fund just doesn’t seem as fun as investing. With emergency funds, you’re typically not going to see your money grow as quickly as you would if you were to invest it. But, your emergency fund serves a different purpose than your investment funds. With emergency funds, you’re not trying to make money. With emergency funds, your number one goal is to protect your money in a liquid account. With that being said, that doesn’t mean that your only option is to store your emergency fund in a traditional savings account. There are actually other (BETTER) options for storing your emergency fund - options that are generally safe, liquid, and offer higher interest rates than a traditional savings account. Take a look at three different options below:
#1: High Yield Online Savings Accounts
Most traditional brick and mortar banks typically offer incredibly low rates on savings accounts. In fact, per the FDIC, the national average interest rate on savings accounts is 0.09%. Compare this rate to online banks. Online banks tend to operate with lower overhead costs. Because of these lower costs, these online banks can generally offer more attractive interest rates - including higher interest rates on online savings accounts. With online savings accounts, you can find interest rates closer to two percent. Rates are constantly changing, so do a quick search online to find the best rates. Just make sure that you’re familiar with any fees or minimum balance requirements before you open an account.
#2: Money Market Accounts
A money market account is a type of account that you can open at a bank or credit union and that pays interest based on money market interest rates. Money market accounts typically offer higher interest rates than traditional savings accounts. Many money market accounts also come with the added benefit of accompanied debit cards and the ability to write a limited number of checks. One thing to keep in mind, however, is that money market accounts typically require that you maintain a minimum balance to avoid fees. As with online savings accounts, rates are also constantly changing for money market accounts, so do a quick search online to find the best rates.
#3: Certificates of Deposit (CDs)
CDs are like a promise between you and a bank (or credit union or brokerage firm). With a CD, you promise to leave a certain amount of money with a bank for a certain term/period of time in exchange for a particular interest rate. CD terms can vary from as little as a few months up to several years. Typically, the longer the term, the higher the interest rate offered on the CD. CDs generally offer higher interest rates than both online savings accounts and money market accounts. However, one thing to keep in mind with CDs: you may incur penalties if you withdraw your funds from a CD prematurely before the end of the required term. These early withdrawal penalties are set by the institution holding your CD, so make sure you’re aware of these penalties before you invest in a CD.
And that’s it! You should now be ready to receive your stimulus money and either: 1) build up your emergency fund; 2) pay off high interest debt; or 3) invest in the stock market, real estate or a business (IN THAT ORDER). The caps are for emphasis - you really should go in that order! But, of course, it’s your money - so the choice is yours. BUT, under no circumstances, should you use the money to go and buy a designer handbag. You really don’t need one. You’re perfect without a handbag. Also, they’re expensive. So, don’t do it! Okay? :)
Why You are Living Paycheck to Paycheck - Harsh Truth