The IRS has released the $600 per person stimulus check and by now it has hit the bank accounts for millions of Americans via direct deposit and paper checks are en route. There’s little doubt this money is a much-needed lifeline for many taxpayers as we continue to feel the effects of COVID-19.
But receiving the stimulus check means we have a financial decision to make. Sure, it would be fun to go out and have a lovely shopping spree and ignore our bills for a little longer — and who could blame us after the year we’ve all had? But instead of spending money on items we may or may not need, consider these smart money moves instead to put your stimulus check to work for you.
Pay your bills
The reality is, the stimulus check is needed by many to pay bills. We know COVID-19 has wreaked havoc on personal finances, and this includes our basics such as rent, utilities, and groceries. If you’re behind on any payments, the stimulus check should be used to catch up on payments.
Unfortunately, this scenario may be more common than any of us thought possible at the beginning of 2020. But the good news is, the stimulus checks can be used towards your bills and help find relief in a small way.
Not only does this help you avoid further financial turmoil, such as facing eviction or disconnection, but it relieves a bit of pressure on your wallet. It also helps avoid additional late fees or interest charges you might be incurring.
Think of it as a way to stop the bleeding of your finances.
Start or pad your emergency fund
If you’re caught up on your bills and are looking for other ways to use your stimulus check, it’s time to evaluate your emergency fund options.
If 2020 taught us anything, it’s that financial emergencies can truly happen at the most unexpected times. Having an emergency fund in place helps safeguard your finances from going further into debt or an inability to pay an unexpected expense.
An emergency fund
is money specifically earmarked for the unexpected expenses that never happen at a convenient time. Think of hits to your wallet such as your car needing a repair, your washing machine dying, or a co-pay for a trip to the emergency room. A fund can also cover your bills in case you lose a job or can’t work for a period of time.
But how much is enough? You’ll hear most personal finance experts and financial advisors agree three to six months of your monthly expenses is ideal. So if you spend $4,000 per month on bills and necessities, your emergency fund would land between $12,000 to $24,000. This number may seem overwhelming, but remember, this is a long-term goal to build up your fund. A stimulus check is a great way to boost your efforts for an emergency fund.
Practically speaking, a high-yield savings account or money market accounts are good options for storing your savings. You can access your money quickly, and you have the potential for growth with additional interest. Plus your money isn’t sitting in your checking account, begging for you to spend it on non-emergency items.
Pay off debt
If you have credit card debt then put the stimulus check to work for you and pay off (or pay towards) your debt. If you have more than one credit card, focus on the high-interest debt first, then tackle the rest if there is enough leftover.
Is this a fun way to spend money? No. Will this relieve pressure on your finances? Absolutely.
With Americans carrying an average credit card balance of $5,925
, it’s very possible your stimulus check will cover the entire amount of debt, and that’s okay. You are still making positive financial gains by paying down debts.
For instance, let’s say you have a $5,000 balance with an 18% interest rate on your card and you typically pay $200 per month towards it. Under this scenario, you would pay off the total debt in 32 months. However, if you put an additional $1,200 towards your balance and keep paying your $200 per month, your payoff time is reduced to 23 months.
By eliminating debt, you're eliminating a monthly bill, plus you’re avoiding additional interest charges that pile on top of the debt.
Paying towards student loans
One common question is if you should use your stimulus check to pay off your student loans.
If you have student loan debt, either with or without other debts, you should consider prioritizing this debt last if you have others to pay. With 0% interest rate on Federal student loans through the end of January 2021, a better tactic would be to pay towards higher interest cards.
But if student loan debt is the only debt you carry and the stimulus check helps you eliminate debt once and for all, then being debt-free is always a smart idea.
Fund your savings account
If you have an emergency fund in place and your debt is paid off, consider funding additional savings. How is this different from an emergency fund? Long-term savings can be used for big goals such as a down payment, retirement, or a child’s education. A stimulus check is a smart way to boost your savings so the money can grow over time.
Another difference between your long-term savings account and an emergency fund is accessibility. Since ideally, you will not need to access this money to cover an emergency it gives you more options for saving.
No matter what you end up using your savings account for, the stimulus check is an ideal way to increase savings and put your money to work for the long-haul. For married couples, this doubles your contributions, which may help your new-home fund.
Contribute to an IRA
If you would specifically like to build up your retirement savings, using your stimulus check to contribute to an IRA is another smart financial decision. IRA, which is short for Individual Retirement Account
, is money you specifically set aside for retirement. In return, you receive tax advantages, potentially on this year’s tax return or when you use your money in retirement.
There are several types of IRAs, but the two most common are Roth IRA or a traditional IRA. A Roth IRA allows you to pay taxes on your investment after you retire. The thought being when you’re retired you’ll be in a lower tax bracket and won’t have as much income to be taxed on. With a traditional IRA, you pay the taxes upfront.
No matter which IRA you choose, putting your stimulus money into one is a smart move because of the tax advantages an IRA offers. As long as you meet the eligibility requirements and keep the money in there for retirement, then an IRA can be an essential part of your future income.
If your employer doesn’t offer a retirement savings program or you’re self-employed, you can beef up your own retirement savings account with an IRA. In 2021, the IRS limit for contributions is $6,000 per person, for those under 50. Your stimulus check is an excellent way to open and fund an account or add to an IRA you already have.
Invest in a 529 plan
If you have children, no matter how young they are, you’ve likely already started thinking about the enormous costs of education that face you as a parent. Fortunately, there are savings plans available known as a 529 plan (named after the tax code it applies to).
529 plans are savings plans you contribute to and can be used not only for secondary school (such as college or a technical school), but also K-12 expenses. With these plans, the best course of action is to start saving early, while your children are young. Otherwise, you won’t realize as much benefit if you wait until the kids are getting ready for college.
529 plans are beneficial because your money grows tax-deferred. This means as long as you’re contributing and using the designated funds for the defined educational expenses, then the growth on the account isn’t subject to federal or state taxes. Then when you withdraw the money (again, for educational purposes), you’re allowed tax-free withdrawals.
There are currently 31 529 plans available throughout the country, and you do not have to live in the state that operates a plan you’re interested in. For instance, if you live in Florida, but you like the way the 529 plan in Utah is set up, then you can choose Utah.
Your stimulus check is a great way to start an educational fund so you know the money will be there when you need it. And by the way, if your child (or children) end up not needing it, you can use the 529 plan for yourself or an immediate family member.
Perhaps none of these ideas apply or appeal to you but you’re feeling compelled to donate your stimulus money. There are multiple ways to donate your stimulus check and support your community.
From food banks to homeless shelters, there’s no shortage of organizations that could use additional support this year.
When you donate, you can deduct a portion from your tax return. And the CARES Act of 2020 changed the contribution rules to further reduce the amount of taxable income. Using your stimulus check is an amazing way to not only help others in need but also maximize the new charitable giving rules.
Donating may take on the form of supporting small businesses in your community. No, you won’t receive any tax breaks for ordering DoorDash from your favorite local restaurant, but your support means a tremendous amount to the restaurant owner running a small business.
The bottom line
When it comes to your pandemic economic impact payment money, you have choices. Whether you choose to pay off debt, increase your savings, or donate your money, you can put this additional money to work for you and your future and not let coronavirus get the best of you.