How To Use Your Stimulus Check Wisely

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Over the coming weeks and months, most Americans will receive a stimulus check from the federal government. This check is intended to help people struggling financially as a result of the COVID-19 outbreak, either to directly make ends meet or to shore up their finances for difficult times to come. The payments should arrive in the next month or two, though the legislation states that the IRS has until the end of 2020 to make sure that the payments reach everyone. Most people will receive the money via direct deposit, provided that they have direct deposit information on file with the IRS in order to submit or receive payments on their income taxes.

Let’s dig into the details of the stimulus check by first addressing the two biggest questions most people have and following that with smart ideas on how to use that stimulus money for maximum financial benefit.

Are you eligible for the coronavirus stimulus check?

If you are an American taxpayer who reported $75,000 or less in taxable income on your last filed tax return, you are almost certainly eligible for the stimulus check. If you filled your taxes jointly with your partner, then the income threshold is doubled. This includes Social Security recipients.

If you reported between $75,000 and $99,000 in taxable income, you’ll receive a smaller amount.

If you did not file taxes in 2018 or 2019, you should consider filing immediately. Follow the IRS Coronavirus guidance if you fall into this group.

How much will you receive?

Individuals who earned $75,000 or less will receive $1,200 in stimulus money. Married couples who filed their income taxes jointly earning $150,000 or less will receive $2,400 in stimulus money. In addition, for each dependent child you have, you will receive an additional $500 in stimulus money.

However, from that pool, your check will be $5 smaller for every $100 in which you exceed $75,000 in reported income (or $150,000 in reported income for a couple). For single people, then, you’ll receive no check if your reported income level is $99,000 or above, and for married couples, you’ll receive nothing if your reported level is $198,000 or above.

These levels cover the vast majority of American households, so most people will be receiving the full payment and many more will receive a reduced payment.

For example, if you are a married couple with two children who filed jointly and reported $80,000 in income, you will receive $3,400 in stimulus money — $1,200 for each partner, plus $500 for each child.

So, what should you do when this money comes in? Here are the smartest things you can do with that money when it arrives.

Get caught up on your bills.

If you find yourself behind on some of your bills, getting caught up on them can be one of the smartest financial moves you can make. Late bills often generate late fees, which add to the amount that you owe, plus being too far behind on your bills can have a negative impact on your credit score, which can impact things like your insurance rates, your ability to get loans going forward, your ability to get credit going forward, and even your ability to get a job.

Here are some tips on using some of your stimulus money to get caught up on your bills.

First, contact the company issuing the bill and see if they have any special programs for late payments related to the COVID-19 outbreak. Many businesses are waiving late fees, pushing back due dates, and making other changes to bill payment right now, so if you’re considering paying off a late bill, make sure that the business you owe money to hasn’t made changes like this.

Focus on basic bills first. The more vital a bill is to supporting your basic needs, the more important it is that you get up to date on that bill to ensure that service isn’t terminated. Make sure that your rent or your mortgage of your home is up to date. Make sure the electricity bill and the water bill are up to date. If you need your car for commuting, make sure your car payment is up to date. The risk of losing those basic services right now is too great.

If a bill seems less important right now, consider closing it or downgrading it once it’s up-to-date. For example, if you’re a month behind on a club membership and it just seems frivolous or useless right now, use stimulus money to get up to date and then close out the bill so that you’re not dealing with it in subsequent months.

Unless your situation is extreme, getting your bills up to date should not absorb your entire stimulus payment. It should merely consume a portion of it. If getting up to date on your bills would absorb your entire stimulus payment, you should spend some time assessing what your most pressing needs are and use the money to secure those needs in the short-term. How can the money ensure that you have food, water, clothing and shelter in the coming months? You should only get up to date on the most urgent of bills, let the rest slide, and build an emergency fund.

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Establish (or build up) an emergency fund.

An emergency fund is just what it sounds like — it’s a pool of money set aside to access solely in financial emergencies. It’s a good idea to have that money in a separate location from the rest of your cash (such as in another local bank) so that you’re not tempted to access it frequently, but also in a place where you can access it with ease if you choose to do so.

Here are some specific strategies for getting your emergency fund going.

Establish your emergency fund in a savings account at a different bank. My usual recommendation is to get a savings account at a different bank or credit union than the one you typically use and stow away that new ATM/debit card in a safe place in your home so that you’re not tempted to access that money when using your normal ATM/debit card but you can easily access it if needed. Stick with money in a savings account for your emergency fund, as credit cards can’t be used in all situations and cash on hand presents a greater security risk due to theft and natural disaster. You can sign up for a savings account online with most banks and put money in that account without ever leaving your home!

If you don’t already have an emergency fund, use most (or all) of your stimulus check to set one up. There’s almost no better moment than right now to have an emergency fund set aside for yourself given the economic uncertainty in the days ahead. This is a simple choice you can make that will secure your short term future. Just put your stimulus money in that emergency fund and forget about it until an actual emergency hits. A good starting number to aim for is a month worth of living expenses if you’re living really lean.

If your job is stable, consider adding a small recurring transfer to your emergency fund. Setting up a small weekly transfer of $10 or $20 from your checking account to your savings account means that your emergency fund will continue to grow over time. That way, you’ll have plenty of money set aside when emergency does strike.

Set it and forget it. Once you have your emergency fund set up, just forget about it in terms of your daily life. Let that money sit there unused until an actual emergency strikes in your life, like a job loss or a car breakdown that you just simply can’t afford. That’s the moment when an emergency fund will make all the difference in the world. Plus, simply knowing that you do have an emergency fund provides a little bit of stress reduction in your life.

Pay off your highest interest debts.

If your bills are up to date and you have an emergency fund that has at least a month’s worth of lean living expenses in it, your options really open up and the best option is highly tied to your specific financial situation. The rest of this article will focus on some of those options, ones that are particularly good in specific situations.

If you have a lot of credit card debt but are professionally secure, paying off your credit cards and other high-interest debts is a really good move. Credit cards accumulate interest at an incredibly fast rate; the interest alone adds another regular monthly bill to your life that you can easily eliminate (and it’s the worst kind of regular bill because you get nothing out of it).

Here are a few suggestions if you’re considering using your stimulus payment to eliminate credit card debt.

Before you make a payment, see if you can execute a zero-interest or low-interest balance transfer. Some credit cards allow users to transfer the balance of other cards over to them at a reduced interest rate. You also may be able to sign up for a new credit card that offers a zero-interest balance transfer offer, which would enable you to transfer the balance on your highest interest card to a new card.

Put your stimulus money toward whichever debt has the highest interest rate. Once you’ve done any balance transfers you are eligible for, apply your stimulus money to whichever debt currently has the highest interest rate. If you’re looking at paying down a balance transfer, compare them based on what the interest rate will be once the introductory period wears off.

Lean into your natural changes in spending habits to keep from adding more debt back onto your cards. During this period, pretty much everyone is seeing a drop in their nonessential spending, and in terms of establishing a good financial foundation for the future, that’s a good thing. Lean into those changes and use this as an opportunity, along with your stimulus money, to drastically reduce or even eliminate all of your high-interest debt.

Make a big Roth IRA contribution.

Another option for your stimulus payment is to use it to save for your own retirement. Eventually, we all want to retire (or at least dial back our work efforts), and the more we have put away for retirement, the easier that choice becomes. The extra money we save now supplements our Social Security and any other retirement benefits we’ve accrued.

If you feel like you’re behind with your retirement savings or really want to accelerate things, consider putting that stimulus payment in your Roth IRA. If you don’t have one, it’s pretty easy to open one online through the investment house of your choice; I consider Vanguard, Fidelity and Schwab to all be good options. Then, once you have your account opened up, transfer the balance of your stimulus payment in there. Here’s a great article on the basics of a Roth IRA.

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If your income is low enough to receive a stimulus payment, your income is low enough to start a Roth IRA. You don’t have to worry about whether you are eligible because the income limits on the stimulus payment are actually lower than the income limits on a Roth IRA.

Roth IRA earnings aren’t taxed in retirement, so if you make money in the account over the years, you’ll be able to withdraw it tax-free. This is the big advantage of money put aside in a Roth IRA. If you put in $2,400 now and let it sit for 20 years until it grows to $10,000, when you start withdrawing that money, you’ll owe no taxes on that $7,600 in growth. It’s tax-free.

You also have the freedom to withdraw your contributions at a later date, though it still counts against the total you’re allowed to contribute in a given year. If you do decide that you need money early from your Roth IRA, you can withdraw your contributions for no penalty whatsoever. (You can’t touch the gains until retirement, though, without paying taxes on them along with an additional penalty.)

Roth IRAs give you enormous freedom for investing. Most Roth IRAs allow you to invest in pretty much anything you want — stocks, bonds, real estate, whatever. If you feel overwhelmed by the options, choose a Target Retirement fund that matches the approximate year you think you’ll retire, as such funds are managed with that retirement date in mind. When it’s far away, the money in the fund is invested aggressively; as it gets closer, the investments are dialed down and are more conservative so you won’t lose a lot of your investment during a downturn.

Invest in yourself.

Another great option that you should consider is the option of investing in yourself. You can use this money to pay for educational options to bolster your career or help you start down a path to a new one. Even better, many such opportunities are available online, so you can get started immediately even during social distancing.

If you want to bolster your career to give yourself more options or career safety, or you want to start down a new path, consider using that money for education. Here are some options to consider.

There are many, many opportunities for online degrees and certifications that match your field. Many reputable colleges and universities offer full online education, and many more offer partial online learning (with some classroom time mixed in), though those options are changing and expanding. Many professional certification options are also accessible online. The question you should be asking is what is the next step I need to take in my career. Your stimulus money can be the seed money for this.

There are also tons of options for starting anew in a different field. You don’t have to think about things in terms of your own career. Rather, consider the option of using this money to launch yourself down a different career path. As noted above, there are degree programs and certification programs that you can start online for many subjects. The real question is what you’re interested in.

Beware of online training that won’t really help your career. Before you turn over any money to an educational option, do your homework carefully. Make sure that the option you’re considering is reputable and, if it issues a degree or certification, that it is accredited. Will completing this material actually help you move forward in your career? Will this material actually help you get started on a new path? Do the research before you turn over the money.

Your stimulus money can help get you through a tough time or be the beginning of a new chapter, as long as you use it wisely.

For many families, the stimulus payment will come as a lifesaver, helping them get through a period of unemployment and serious economic uncertainty.

For others, the stimulus payment will provide a great opportunity to shore up their financial situation against the unknowns of the near future.

For still others, it can provide an opportunity to forge a new direction in life.

The point is this: don’t waste this opportunity. No matter where you are in life, you can use this stimulus payment to improve your financial situation permanently.

This is a transition point for many of us in the world right now, and this money can help you come out of that transition in great shape, no matter what your situation is like and no matter what your plans for the future are.

Good luck.

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