The stock market is quite volatile right and many investors are a little bit panicky. One of the reasons is that the VIX, the system used to measure volatility in the S&P 500, double in the last month.
The fact is, when financial markets are in any kind of turmoil, it’s usually a good idea to do nothing. If you’re sitting on a lot of cash however, money that hasn’t been earmarked for any type of expense or that wouldn’t be better spent paying off any high interest debt that you might have, there are a few things you can do to make sure you get the most out of it.
Of course, as the holidays approach, many consumers think the best choice is to take that cash and spend it on gifts and other holiday festivities. While that’s not a completely bad idea, a better one would be to take at least a portion of that cash and put it towards an emergency fund.
There are literally dozens of surveys that have been taken over the last few years showing that the average American consumer is ill-equipped to handle a financial emergency. In fact, most aren’t even prepared to cover an expense of $1000.00 from their checking account, which could easily be spent om major car repairs or a new HVACX system for the typical home.
One survey showed that 64% of consumers would have to either sell an asset, borrow money or take money earmarked for other bills to pay that $1000.00. Bankrate.com reported just this past June that over 25% of American consumers have no emergency funds whatsoever, and that 75% don’t have enough to cover 6 months’ worth of expenses as experts say they should.
Taking some of that ‘spare cash’ and using it to purchase stocks that are on sale is also an excellent idea, especially considering the recent market sell-off. Indeed, some companies are trading cheaper right now than before they announced their quarterly earnings, including Goldman Sachs, Bank of America and Citigroup.
These companies, and many more like them, are down in price because of the stock market’s overall performance, not due to the actual business itself.
You could also use some of that extra cash to contribute to a retirement account that gives you tax advantages, like a 401(k) or Roth IRA. Not only will you then have more money when you go to retire, but saving now will force you to think about the fact that you won’t be working forever and get you into the ‘mind set’ of putting money into savings for later in life.
The plan that you choose depends on a lot of factors but, if you’re young, a Roth IRA is probably the best bet because it allows capital gains to grow tax-free (as long as you don’t make any withdrawals that don’t qualify). If you’re employed by a company that has a matching 401(k) plan you’d do well to put money there and take advantage of every last dollar that they’re willing to give you.
So before you go out and spend all of that ‘found cash’ on holiday gifts and frivolity, make sure to consider the three alternatives above and at least put some of that money aside for later. Go ahead and spend some, but don’t go overboard, and you’ll thank yourself later.