At this point, many Americans are seeing $1,400 stimulus checks hit their bank accounts, and while some people are using that money to pay their bills or dig out of debt, others have a real opportunity to snag an even bigger windfall by investing that cash instead.
If you don’t need your stimulus to cover your near-term expenses (say, you’re still working and collecting your usual paycheck), investing it could be a very good idea. But you’ll want to avoid these big mistakes if you decide to go that route.
1. Buying only one stock
If there’s a specific stock you’ve been eying over the past few months, you may decide to take your stimulus check and scoop up some shares. But before you put all of that money into a single company, make sure your portfolio is diverse already. If it isn’t, then you’re better off branching out and buying stocks from different market segments rather than putting all of your cash into a single stock.
2. Investing in meme stocks
Meme stocks have been all the rage this year. These are stocks that have gained notoriety through social media platforms — think GameStop (NYSE:GME) and the like. You may be tempted to buy meme stocks after having seen their values skyrocket recently. But the problem with meme stocks is that many of these companies aren’t stable, and their growth is a product of media frenzy more so than actual financials.
Take GameStop as an example. Its stock price soared in late January, but at this point, it’s trading for almost 50% less than it was eight weeks ago. Instead of buying stocks that are getting a lot of press, you’re better off buying quality stocks with solid long-term growth potential.
3. Investing at all when you don’t have a solid emergency fund
Just because you don’t need your stimulus to pay near-term bills doesn’t mean you can afford to part with that money. If you don’t have a solid emergency fund — one with enough cash to cover at least three full months of living expenses — then you actually shouldn’t be investing your stimulus at all.
Instead, you should put that money into a savings account so that if you run into a significant unplanned expense or you lose your job, you’ll have cash reserves to fall back on. While it’s true that investing your stimulus will help you grow wealth faster than a savings account will, you also don’t want to put yourself at risk of racking up costly debt in the absence of having enough money in the bank.
There’s a good chance this current round of stimulus checks will be the last windfall the public sees for a while. And to be clear, that would actually be a good thing, as it would signify a recovering economy. Investing your stimulus cash is a good way to make the most of that money, but be sure to avoid these big mistakes so you don’t wind up regretting your decision.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.