By Lee Sherman
Planning for the unexpected is an often-overlooked aspect of financial planning. In general, most financial advisors advise staying the course and avoiding as much as possible a sudden change in your expenditures. That said, a sudden windfall, like that many Americans are receiving in the form of $1400 stimulus checks, has many people thinking about what to do with this “extra” money. Let’s start by looking at the reason for the stimulus checks themselves.
This money (along with the $300 a week in extra payments allocated for unemployment money) is designed for two things. First, to paper over any expenses you may have during the pandemic (like food and rent). For many people, this lifeline will make the difference between keeping financially afloat and descending into abject poverty. It’s not a pretty picture.
The second reason however is to provide a general kickstart to the economy (hence the term “stimulus”). By all accounts, all of the skipping restaurant meals and travel has lead to a savings boon along with a pent up demand to spend money.
It’s certainly understandable if you want to spend this stimulus money (or any sudden windfall) in a frivolous manner. When it comes to your finances, this might not be a bad time to dabble in such speculative investments as bitcoin or NFTs or to buy individual stocks as a supplement to a balanced portfolio. Only your financial advisor can tell you if this right for you.
As we said the last time we covered this topic, don’t be swayed by emotion. There’s no need to rush into anything. Your stimulus money was automatically deposited in your banking account (savings, money market or CD) where it is hopefully earning a good amount of interest (if not, please reevaluate where you stash your cash). By not touching it for a few months, it will give you time to make a more considered decision on what to do with the money.
You should consider any windfall (whether it is an inheritance, lottery winnings, or proceeds from the sale of a business) in the context of the financial plan you already have in place. You can use the money for anything but in terms of priorities you’ll want to stick to the plan. Do you need the money to pay off debt? Do you already have an emergency fund in place that could use some additional funding (financial planners advise a minimum of six months)?
Once the basics are covered (ie: debt paid off and credit established), you’ll be ready to invest. This is a good time to revisit your portfolio’s asset allocation and re-balance as necessary. Frequent windfalls could be an indication that you are weighted too heavily toward a growth strategy when a volatile market like the one we’ve seen during the pandemic might mean it’s time focus more on portfolio preservation. If your windfall was particularly large (like selling a business) the tax implications could be significant (you may be in a higher tax bracket or need to pay capital gains). That could mean spending your windfall on a tax-free investment such as municipal bonds in order to reduce future taxes.
While it’s prudent to try to maximize the impact of your windfall, no one will blame you for using it to purchase something you’ve always wanted, like a rare Banksy. Financial planning can be dull but a windfall adds an unexpected element of fun.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.