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Expecting Stimulus? Five Ways to Use Effectively

Times have surely been hard on the majority of Americans, but there is some hope on the horizon in the form of another potential round of stimulus checks. While Congress has yet to nail down all of the details, there appears to be momentum building towards stimulus checks of up to $1,400 for individuals making less than $75,000 per year and families making less than $150,000 per year, which are the same income restrictions as the last two rounds of stimulus checks. There would likely be a phaseout range for those above this income limit potentially enabling higher earners to receive a smaller sized check, depending on how much the limit is exceeded by.

If you are expecting to receive either the full check or a partial one, here are a few ways to use your stimulus check effectively.

1. Basic Needs

The stimulus checks are intended to assist those in the most financial distress. First and foremost I must mention that the absolute best thing you can use your check for is food, water, shelter, and other monthly fixed/necessary expenses if you have not been able to afford these already. Economic challenges are severe for a high number of Americans right now, and existential financial threats are more common than we are accustomed to.

2. Pay Down Debt

This may seem like another obvious option, but it is important to note that consumer debt was already a significant issue in the US before the pandemic and things have certainly not been made easier over the last year. According to Experian’s 2020 Consumer Credit Report, Americans carry an average personal debt of just under $93,000. This number includes credit cards, student loans, mortgages, and personal loans. While there have been many relief programs put in place during the pandemic that have helped consumers manage debt, these will not last forever. Consider paying down your debt with the highest interest rate first as it will provide you with the most impact per dollar. These are typically credit cards as their interest rates typically climb into anywhere in the 15-30% interest rate range. We have a resource on refinancing and debt management here.

3. Boost Your Emergency Savings Fund

One lesson we’ve learned over the last twelve months? The world is not as predictable as we may think it is. It is always prudent to have money socked away for an unplanned expense like a car repair or medical emergency. But now, many are forced to deal with the question of how they will cover ALL of their expenses if their ability to earn income is put on hold.

Unemployment benefits were in such high demand that many Americans had to wait a long time to receive their benefits. Some never received any at all. If you currently have the financial flexibility, and you don’t already have an emergency equal to around 3 – 6 months of expenses, it may be prudent to consider putting some or all of your stimulus check away in savings. However, stuffing cash under the mattress isn’t quite the most optimal financial strategy. Consider opening a high-yield savings account, a certificate of deposit, or some other form of short-term savings vehicle with the potential of at least a small amount of growth.

4. Send it to the IRS      

The idea of getting your stimulus check and sending it right back to the government certainly doesn’t seem like the most enticing option of what to do with your extra cash. But for those who are self-employed, or do not have money withheld for taxes, this year’s tax bill may come faster and hit harder than other years.

This year many people have been living paycheck to paycheck, with every dollar relied on to cover expenses. Writing a large check to the IRS may seem daunting. If you are in this position and you expect to receive all or part of the next stimulus check, the timing should work out so that you are getting some extra cash just as that big tax bill is coming due.

5. Open a Roth IRA

Roth IRA’s are fantastic tools for saving for retirement, but unlike most other retirement accounts they also have the flexibility to access your money in certain situations. There are exceptions that allow you to avoid early withdrawal penalties for things like medical expenses, education expenses, and disaster relief. However, in addition to these exceptions, Roth IRA’s actually allow you to withdraw any contributions you have made at any time, tax and penalty free. In order for earnings to be withdrawn free of taxes and penalties, they must stay in the account for a 5 year holding period and can’t be withdrawn until age 59 ½. But as long as you don’t withdraw more than you have contributed you will avoid taxes and penalties.

This is due to the fact that Roth IRA’s are funded with “after-tax” money, meaning that your contributions have already been taxed before you put them into the account. Except for this one time! Your stimulus check is not taxable income, so you actually get away with putting tax-free money into your Roth IRA, and then withdrawing that money tax-free (as long as you only withdraw contributions, or wait for the 5 year holding period and after age 59 ½  to withdraw contributions and earnings). Many brokerage firms have minimums that are required to open an account or to invest in funds within the account, so using your stimulus check to open one may be of great benefit.

Summary

In reality, these are only a handful of the responsible and savvy things you can use your stimulus check for. Everyone’s situation is unique and the needs and goals of the individual or family should always be carefully evaluated before deciding what to do with an extra inflow of cash. Consult with a CFP® professional if you have any questions on how to approach handling a stimulus check in your specific situation.