Help on the way. It’s not just an iconic Grateful Dead tune, it’s the truth in action, thanks to the passage of the American Rescue Plan. The 1.9-trillion pandemic relief package has ushered in a third round of stimulus payments coming via direct deposits, checks, and debit cards. Funds are already arriving — check the status of yours here.
But with the payment comes a question: how to spend it? First off, do not take advice from Twitter or your group chat. Do not try to multiply your windfall by “investing” it in a third-tier cryptocurrency or a digital NBA highlight, or by letting it roll with a big March Madness bet. You need to have a plan.
“Otherwise, you’ll likely fritter it away,” says Janet Alvarez, a personal finance expert at Wise Bread.
This spring is going to be a bonanza for some families, Alvarez points out. Three things are happening in near-unison: the stimulus check, your usual tax refund, and new tax credits. Many parents might look at their checking account in coming weeks and notice a bigger balance than they’ve had in months. If you have dependents, you’ll qualify for $1,400 for each for them, too — meaning a two-parent, two-kid household making under $150,000 should have a $5,600 on the way.
But instead of spending the money ad hoc, consider a triage. “The first thing that a family should do when receiving this money is to figure out how they can use it to catch up on your essential expenses,” says Rich Hendrickson, a Benton, Kentucky-based Regional Partner at Concurrent Advisors. That means things like paying off debts and making sure your emergency fund is back at a reasonable balance.
Here are some important things to remember before you spend your stimulus check.
1. Before back-paying your mortgage or rent, do some research.
If you’re really struggling — maybe you’ve been jobless, or you’re still recovering from being jobless — your first instinct upon getting the stimulus payment might be to pay the rent or mortgage, as they’re likely the largest monthly expense, and thus seem the most important. But it might be wise to refrain from doing so for one reason: extensive rent and mortgage moratoriums in place right now could eliminate, delay, or reduce your payments.
If you’re renting, visit the Consumer Financial Protection Bureau’s list of Help for Renters. The agency also maintains a list of mortgage relief options and protections. If you lean on one of these programs, it could free up your stimulus money for more pressing life expenses.
“I would really argue you should take advantage of all of those programs and not spend a cent more than you need to,” says Alvarez. Tread carefully, though: the news is changing quickly here. The Centers for Disease Control and Prevention is expected to extend the eviction order, currently set to expire on March 31, through this summer — but hasn’t done so yet.
2. Ask yourself: As COVID hit, what did I let fall through the cracks?
Okay, now it’s time to think back over the past year. When you needed the money for groceries or daycare, did you cut otherwise essential expenses like your health insurance? Did you drop your life insurance policy? Do you have a pile of medical bills that have gone unpaid and might end up sullying your credit score? Have you put off an utterly essential (i.e. health or safety-oriented) repair to your home or car? Take some time to assess the expenses you might have pushed back due to economic necessity. “You’re looking for the things that you might have missed,” says Hendrickson. “Some of these things you cut, or delayed payments on, you might have forgotten. It’s time to square those up.”
3. Replenish your emergency savings.
Financial advisors all have different approaches and viewpoints, but every one of them I’ve spoken to seems to agree on one fundamental: considering the emergency fund the cornerstone of your personal financial health. It’s quite possible that during the past year you dipped into your emergency savings (You’re not alone. I did.) Now’s the time to replenish it. How much do you need? Most advisors recommend three-to-six months’ worth of your total living expenses — including rent, food, transportation, and entertainment. You can go on the lean side if your industry, location, and skill set would help you land a job quickly should you lose your current one; be more conservative if you’re in an industry where the job market is tougher.
4. Wipe out — or defer — high-interest debt.
Now it’s time to attack some of that debt you racked up over the past year. “With interest rates as low as they are right now, you shouldn’t be paying a fifteen percent interest rate on anything,” says Hendrickson. Pay down what you can, while considering your emergency fund at the same time — these are equally as important. Maybe go half and half. If you have good credit, are carrying a balance, and expect your income to pick up over the next year, consider transferring your balance to a credit card with a 0% temporary APR. This would give you some breathing room to use your stimulus money for more urgent needs. Just keep in mind that all balance transfers eventually come due.
5. Take care of your investments
If you’ve made it this far, you’re in good shape. You still have some stimulus money left, and you want to make it grow in the stock market. Good. If you don’t have an IRA, start one — it takes 15 minutes. Literally. A Roth IRA, available to singles who make under $140,000 and couples who make under $208,000, allows you to contribute up to $6,000 per year with significant tax advantages (if you make more, there’s a legal loophole to starting one.) In normal years, the deadline to contribute to last year’s IRA is tax day, April 15th; in 2021, the IRS has extended this deadline until May 17th, or June 15th if you’re in Texas. Once you’ve opened an IRA, consider putting your funds in a lower-risk investment vehicle like a broad market ETF, rather than on a single stock like, oh, GameStop. If you’re all buttoned up on the IRA front, consider using your stimulus money to open a 529 Plan for your kid’s future education costs.
6. Plan that long-awaited vacation or family visit.
Now the fun stuff. You’re vaccinated — or will be soon. You haven’t seen MeeMaw and PeePaw and PayPal or whoever in a while. They’re vaccinated (hopefully). Your kids are safe to visit with vaccinated grandparents indoors. Consider booking travel soon — even if it’s for later this year, as airfare and hotel rates are expected to rise.
7. Spending your stimulus on something else? Consider doing it locally.
It’s worth remembering that the whole point of the stimulus is to reinvigorate the economy, buoying spending and employment. The closer to home you spend your money, the better off your community will be.
“I live in a town of four thousand and feel very, very strongly spending money through local businesses. It makes the whole thing work,” says Hendrickson. Didn’t Jeff Bezos make enough money off of you over the last year, anyway?
8. Don’t need it — or feeling really altruistic? Share the wealth.
Maybe you’re doing so well that you don’t have a pressing need for the money that just showed up in your account. That’s fantastic. Consider passing it on to those that do really need it, via a mutual aid fund— a non-profit organization rallying local recovery efforts. Find a nearby one at Mutual Aid Hub.