Why experts say not to invest yours in risky stocks
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The latest set of $ 1,400 stimulus checks makes its way eligible Americans.
Now these people have an important decision to make: what are they going to do with the extra money?
Investors aged 25 to 34 plan to spend half of stimulus payments on stocks, and those 18 to 24 will spend around 40% on assets, according to a recent Deutsche Bank survey. Stimulus payment tracking data from Cardify.ai, a market research company, revealed that respondents planned to spend 32% of their checks on stocks or cryptocurrency.
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In recent times, so-called meme stocks have been on a wild ride fueled by retail investors. GameStop over the past few months has been driven in part by traders on Reddit looking to cut back on hedge funds betting against the company. The stock fell 33% on Wednesday following the company’s quarterly earnings report, but then wiped out the loss in midday trading on Thursday.
Financial planners typically advise people to use their stimulus checks to shore up their personal finances and prepare for the future.
Still, some may want to allocate some of the windfall to hot stock.
“As long as they understand that this is a gamble and not the real path to wealth, it’s fine,” said Jessica Goedtel, certified financial planner and senior planner at Facet Wealth, a registered investment advisor in Baltimore.
“But, times like this are really good opportunities where we can re-evaluate where we’re trying to go in life and what we’re trying to do with our money,” she said.
Boost your emergency savings
This year in particular has highlighted the importance of having emergency savings in the bank, making such an account a great place for some of your latest stimulus checks.
“If someone doesn’t have emergency funds, this is a good place to start,” said Anjali Jariwala, CFP, CPA and founder of FIT Advisors in Torrance, Calif.
And, you don’t necessarily have to put all of your check into savings if you have multiple financial goals. Studies have shown that even saving small amounts of money, like $ 100, can protect families from adverse events such as the shutdown of utilities or the need to relocate.
Pay off the debt
If you have outstanding debt, spending all or part of your stimulus check on it is also a sound financial idea.
Experts generally advise starting with high interest debt, such as credit cards. The more you can repay, the less you will pay over time as interest accumulates.
Checks could also be used to pay off rent arrears or to pay off auto or personal loans. People could also invest the money in student loans, although most payments are currently on hold due to the pandemic.
Invest in a well-balanced portfolio
If you are planning to invest your economic impact payment in the stock market, experts generally advise you to place that money in a well-balanced portfolio that is intended to grow over time. This could be a retirement account or another investment account invested in a range of stocks and bonds, depending on your schedule.
“Invest your check today and let it sit for 20 years,” said Stephanie Trexler, CFP, CEO and financial advisor at Golden Goose Wealth Planning in Grand Rapids, Michigan. “It’s going to pay a lot of dividends.”
It’s also a much better bet than investing in a single volatile stock, where all your eggs are in one basket, Trexler said.
Contribute to a retirement account or plan 529
You can also devote some of the money to your or a child’s future by investing it in an individual retirement account, health savings account, or even a 529 plan.
Investing in such accounts is another way to grow your money for the long haul.
If you haven’t made the maximum contribution to an IRA or HSA in 2020, you can put the money into such an account now, before the deadline. If you haven’t yet declared your taxes for 2020, this decision could also help you reduce your tax. adjusted gross income To benefit from other tax advantages.
If you’re on solid ground with your finances, including your retirement savings and an emergency fund, you might want to spend that as well.
“We’re just trying to make sure the money is invested or used appropriately,” Jariwala said. “But, you know, we should also be rewarding ourselves for the hard work we do.”
This could mean carving out part of the stimulus check to take a trip in the future or purchase an item you’ve saved up for.