En español | Did you get an extra $1,400 in stimulus money? If you were married, it may have been $2,800. What you should do with this money varies according to your own financial situation, but here are some suggestions to consider. These suggestions are obviously for those who aren't currently struggling to stay on top of bills and who have a reasonable cash reserve that allows them to be able to sleep at night.
1. If you have debt
First of all, if you have debt, consider paying it down. The average credit card interest rate is 16.12 percent annually, according to CreditCards.com. Because credit card debt is not tax-deductible, paying it down is like getting a guaranteed tax-free 16.12 percent return.
You can't deduct the interest on most debt (except some mortgage debt and some student loan debt), so paying it down is like getting a tax-free return. Even if you have a low-cost mortgage with a 3 percent interest rate, paying that down may make sense as well. You are likely not getting much or any of a tax benefit from your mortgage. Only about 12 percent of households itemize, with 88 percent taking the standard deduction. So paying down your mortgage is like getting a guaranteed tax-free 3 percent return.
2. If you are debt-free but need the money in the next few years
The stock market is risky. In the 33 days between February 19 and March 23 last year, the U.S. stock market lost about 35 percent. There is no guarantee it will recover quickly the next time, so it's generally a bad idea to take much risk with money needed in the short run.
Investing in a certificate of deposit from a bank or credit union may be the way to go. DepositAccounts.com and Bankrate.com are two good places to look. I know rates are low right now, but at least you'll earn a few bucks in the meantime.
3. If you need the money in the next five or 10 years
You can take some risk with this money, so consider a simple low-cost balanced fund. These invest in stocks and bonds — typically 60 percent stocks and 40 percent bonds — and they will automatically rebalance for you. When stocks tank, they buy the stocks on sale, and when stocks surge, they sell at a much higher price. So consider the Vanguard Balanced Index Fund Admiral Shares (VBAIX) which has 60 percent U.S. stocks and 40 percent bonds and charges 0.07 percent annually, or 70 cents per $1,000 per year. You will, however, need at least $3,000 to meet this fund's minimum to purchase.
Other firms have good low-cost balanced funds, as well. The Fidelity Freedom Index 2025 Fund(FQIFX) has roughly 58 percent stocks with a 0.12 percent annual expense ratio with exposure to international stocks. It will slowly get even more conservative as you get older.
Schwab and other firms have good low-cost balanced funds as well. The Schwab MarketTrack Balanced Portfolio (SWBGX) also targets about 60 percent stocks and 40 percent bonds and has some exposure to international stocks. Its expense ratio is 0.49 percent and has no minimum initial investment requirement.
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4. If you don't need the money for at least 10 years
The U.S. stock market has been pretty reliable over a ten-year period, though there are no guarantees history will repeat itself. Any individual stock is quite risky, so I recommend a low-cost diversified index fund, which will own thousands of companies. For U.S. stocks, consider the iShares Core S&P Total U.S. Stock Market ETF (ITOT) or Vanguard Total Stock Index ETF (VTI). Both have a 0.03 percent annual expense ratio.
For those wanting international stocks, consider the iShares Core MSCI Total International Stock ETF (IXUS) with a 0.09 percent annual expense ratio, or Vanguard Total International ETF (VXUS) with a 0.08 percent annual expense ratio. With a total U.S. and total international stock index fund, you can come pretty close to owning every publicly traded company across the planet.
5. If you don't ever need the money
Passing money along to the kids is only a secondary goal. It's been a tough year and all of our spirits could use a little lifting. Experiences bring far more happiness than stuff, so consider a post-pandemic trip to reward yourself for being cooped up at home for so long. Maybe take the kids and grandkids. That way everyone can cherish the great memories long after the vacation is over. That's perhaps the best investment advice I can ever give.
The one thing all five options have in common is to bring happiness. On the extremes, paying down debt lightens the daily stress while the vacation brings happiness before (anticipation), during and after the trip. So don't leave the money in your checking account earning nothing.
Allan Roth is a practicing financial planner who has taught finance and behavioral finance at three universities and has written for national publications including The Wall Street Journal. Despite his many credentials (CFP, CPA, MBA), he remains confident that he can still keep investing simple.