On Wednesday night, the U.S. Senate passed a giant $2.2 trillion stimulus bill that included $1,200 payments to all U.S. citizens with incomes under $75,000, along with an extra $500 per child. For every $100 in income above $75,000, the stimulus check will drop by $5. The Senate bill still has to be passed by the House of Representatives, but it should either pass the bill as is or even add more benefits for average Americans, given that the House is controlled by the Democrats.
With the recent severe market decline, some people may be tempted to invest those dollars in the market as soon as they receive them. However, while now is a great entry point for long-term investors, make sure you've checked the following boxes first.
Priority No. 1: Bolster your emergency fund
While the stimulus bill is good news and the past few days have seen roaring gains in the market, there's still a high degree of uncertainty as to how COVID-19, as well as the economy, will perform. You may feel secure in your job and health now, but coronavirus cases are still spiking in the U.S. Until we get the disease under control, we just don't know how long the fallout will be. While we do have a model for time-until-peak cases from China, it's still unclear if the U.S. can contain the virus as well or as quickly.
That still leaves many Americans open to both employment risk and health risk. It also means that if you don't yet have an emergency fund of three to six months of living expenses set aside in a savings account, that's where these dollars should go.
Having a solid emergency fund may not be the most efficient use of dollars when the market is depressed, but having the peace of mind that those funds are available can reap a lot of psychological dividends. If, for instance, you decide to invest your check instead and the stock market has another leg down, you may panic-sell at another low. But If you save the money, you could start to nibble at lower prices, as long as your don't deplete your emergency stash below three months.
Priority No. 2: Pay your bills and debt on time
Hopefully, the current downturn is temporary. However, if it's not, we could be looking at an environment in which financial institutions tighten credit in the medium term. That means large banks and lenders might make it more difficult to get a needed loan such as a mortgage, personal loan, or credit card if there's a prolonged recession.
That would be bad news if you have less-than-pristine credit due to not paying your bills. If that happens, you may not be able to get a much-needed loan in the future or have to pay a much higher interest rate than you otherwise would. That's why it's still a good idea to pay your bills and loans on time.
That being said, many lenders are now allowing deferred payments on all types of loans in light of the crisis. For instance, many of the large U.S. banks, including JPMorgan & Chase, Wells Fargo, Citigroup, and U.S. Bancorp, have committed to 90 days forbearance on mortgage payments for those affected by the coronavirus, provided they provide documentation related to hardship. Bank of America has agreed to 30 days, along with commitments to work with customers on a monthly basis until the crisis is over.
Meanwhile, other lenders are offering one-off deferments regardless of the impact of the coronavirus. For instance, holders of the Apple credit card, which is backed by Goldman Sachs, are allowed to defer their March payments by one month with no interest charges or penalties. Meanwhile, most other credit card companies have offered more general assistance based on individual circumstances.
While these programs are nice, you should double-check to make sure enrolling in any forbearance or deferment programs won't affect your credit score. And if you don't have a hardship, it's probably a good idea to pay all your bills on time.
Of course, if you have a revolving credit card balance, pay that down first before investing. Even with this depressed market, the return you get by eliminating a high-teens interest rate on your credit card is still highly likely to do better than the long-term returns of the market, even from these depressed equity levels.
No. 3: Buy from local businesses
My third priority is somewhat unconventional, and one you might not hear from others. If you already have a solid emergency fund, have paid all your bills and credit card balances, and still have money left over, I suggest making an effort to buy food and other goods from local businesses.
Just like social distancing, buying from local businesses is doing your part to not only help stop the spread of the disease, but also the financial contagion. While small businesses will get help from the new stimulus package, every bit of incremental revenue helps. That means instead of stocking up on groceries from a financially strong company such as Costsco, make an effort to order delivery or takeout from your favorite local restaurant. Very likely, these businesses are open for pickup or delivery through one of many third-party delivery apps.
Small businesses have been losing out to large corporations for the better part of two decades, and the current crisis has the potential to accelerate that troubling trend. Still, small businesses currently account for 43.5% of U.S. gross domestic product (GDP), and last year, small businesses employed about 47.3% of the private workforce.
By buying dinner from your favorite local restaurant, you're not only helping keep that restaurant open and its employees on the payroll, you're helping to contribute to the economic recovery from this terrible crisis. While it may be a bit more expensive than stocking up on groceries and making food at home, you'd be doing your part to help the ailing economy at this critical time.
Then, by all means, invest!
If you have a solid emergency fund, paid all of your credit cards and bills, and are buying from local businesses -- and you still have money left over -- then by all means, invest! After all, the recent crisis has provided a very nice entry point for investors with a long-term time horizon. There are many solid bargains out there.