Should You Use Your Stimulus to Pay Off Debt?

Getting a windfall from the government? You may want to use it to knock out existing obligations -- if your financial circumstances allow for that.

The novel coronavirus has been wreaking havoc on the U.S. economy since March, and though parts of the country are starting to open up, it's clear that Americans still need relief. Many have already received a one-time $1,200 stimulus payment, while others are still waiting on that money -- namely, those who did not submit bank account details to the IRS for direct deposit, and now have to sit tight until a paper check arrives in the mail. 

If you're sitting on your stimulus cash, or are expecting it soon, you may have big plans for that money. The question is: Should you use it to pay off existing debt?

Options for your stimulus cash

There are plenty of smart things you can do with your stimulus money, and paying off debt is one of them. This especially holds true if your debt is unhealthy in nature. 

Mortgage debt, for example, is considered healthy debt. It can help you build equity that could serve as a cash source when you need it, and it also won't hurt your credit -- provided you make your payments on time. Credit card debt, on the other hand, is a notably unhealthy type of debt to have. Not only can it cost you loads of money in interest, but too much of it can also lower your credit score. A lower score will make it more difficult to borrow money affordably (or at all) when you need to. 

As such, paying off credit card debt is a smart thing to do with your stimulus cash -- but only if you can first check the following boxes:

1. You have enough money to cover your near-term needs
2. You have an emergency fund with at least three months' worth of living expenses

While paying off unhealthy debt is a smart way to spend your stimulus cash, you don't want to wind up replacing existing debt with new debt. If you don't have enough money at your disposal to pay for essentials in the coming weeks, keep that stimulus cash on hand to buy groceries, pay for medications, and cover any other bills that can't wait. 

If you're good on immediate expenses but lack emergency savings, stick that money in the bank. That way, if an unplanned expense arises, you won't have to charge it on a credit card and add to your debt load. Furthermore, if you end up losing your job during the ongoing crisis, that emergency fund will help you to pay your bills. Keep in mind that your unemployment benefits may not be enough to fully replace your regular paycheck.

Should you be stimulating the economy?

A lot of people are claiming that it's smart to pump stimulus cash back into the economy. And while supporting local businesses is a great way to do this as they reopen, if you're carrying unhealthy debt, paying it off should take priority. You can always pledge to frequent businesses in your area when you're in a better spot financially, but right now, paying off debt is more important. 

Americans may get a second stimulus check

If you've already spent your stimulus money, here's some good news: Americans may be in line for an additional payment. There are a few different proposals on the table. 

The HEROES Act calls for, among other provisions, an additional one-time $1,200 stimulus payment per qualifying adult and child, up to a maximum of three dependents per household. This means that a married couple filing jointly with three children could receive $6,000 under this proposal. 

Meanwhile, the Emergency Money for the People Act, introduced prior to the HEROES Act, calls for $2,000 in recurring monthly stimulus payment for single tax-filers, and $4,000 for married couples filing jointly, plus an additional $500 per child for up to three children per household. These payments would be subject to the same income thresholds as the initial round of stimulus checks so that higher earners may not get all, or any, of that money. Those payments, however, could be made available for up to a full year.

Of course, neither bill has been approved, and Republicans have been pushing back on both Democrat-sponsored proposals. The reality is that neither proposal is likely to go through without adjustments. But hopefully both parties will manage to push politics aside to provide some degree of financial relief for Americans who really need it. And if you do end up getting that money, using it to pay off debt is a good idea. 

The less money you owe each month, the less dire your situation will be if you are laid off in the coming months. And if you manage to stop throwing money away on interest, you'll have more of it available to put back into the economy in due time.

Keep in mind, though, that it may be some time before Americans see a second stimulus check. In the meantime, if you still have money left over from your initial check, aim to stretch it. If you need it to pay for basics, don't use it to chip away at debt. Though using any windfall to eliminate debt is a smart idea, your first priority should always be to cover your immediate needs, and use extra money to get rid of outstanding obligations.