Stimulus checks sent out by the government as part of relief efforts related to the coronavirus pandemic are rolling out to millions of American households. And as those deposits drop into checking accounts around the country, many are probably wondering how to best use those funds.
Should you pay off debt? Stash it in the emergency account? Or maybe send it to your IRA?
There's no one-size-fits-all solution, unfortunately. In the pandemic economy, the right move is a function of your employment status and outlook.
If you're unemployed
If you've lost your job, file for unemployment first. Then visit irs.gov/coronavirus to confirm that the IRS has your banking information. Once you've provided your bank account number, you can request a status update on your deposit. That update should indicate whether your deposit has been scheduled yet and if so, the date you should see it in your account.
Since some states have backlogged unemployment claims, you may receive your stimulus payment well before your first unemployment check. While you're waiting for both, get your banking situation and your budget in order. Ideally, you should have a checking account and a linked savings account, where you can transfer money back and forth quickly. Then, figure out how much cash you need to cover two weeks of expenses. Once your stimulus payment arrives in your checking account, move all but enough to cover you for the next two weeks into your savings account. Keep on that cycle of transferring just enough every two weeks to get by.
There are mental and financial advantages associated with keeping the two separate accounts. The separation builds the mindset that some of your money should be off-limits; you can use what's in the checking account, but you should not touch what's in the savings account. And, presumably, you're earning some amount of interest in the savings account. The interest rate might be dismal, but every penny counts.
Once your unemployment benefit starts arriving, you can deposit those payments to your checking account, and then stop or reduce the transfers from your savings.
If you're retired
One huge perk of being retired is that you never have to worry about losing your job. You may, however, be worried about the recent declines in your retirement portfolio and how that affects your long-term solvency. The good news is that market downswings are never permanent. The stock market has already made up much of the ground it lost in March. And once the economy opens back up again, the rest of the recovery is likely to happen pretty fast.
To ease any unnecessary pressure on your portfolio, use your stimulus check to pay off debt balances first. That'll keep your monthly budget as lean as possible. If you have any stimulus money left after debt paydown, stash the excess in your emergency fund. That way, if unexpected expenses arise, you have the cash to cover them without taking extra retirement distributions. Later, when the world returns to normal, you can decide if you want to leave the money as cash savings or move it to your investment account.
If you're working with an uncertain outlook
If you are still working, but worried about losing your job, you may be nervous about the size of your emergency fund. Put your stimulus check and every excess penny from your paycheck into your cash savings. Your goal is to build up the cash reserves fast, so you won't need to withdraw from your retirement accounts if your paycheck dries up.
If you're working with a stable outlook
A stable work outlook gives you flexibility with respect to how you use your stimulus check. Here are your options:
- Pay off high-rate debt. Reduce or eliminate credit card balances that you've been rolling over. Auto loans, mortgages, and even student loans are less of a priority because these generally accrue interest at less than 8%.
- Add to your emergency fund. Pre-pandemic, the conventional advice was to have enough cash savings to cover three months of living expenses. But the economic environment shows us that it may not be enough. Six months' worth of expenses, or 50% of your income, is a better target.
- Add to your brokerage account. You could also drop that stimulus check into a taxable brokerage account. There, you can invest the money without the withdrawal restrictions that apply to your tax-deferred retirement accounts.
- Contribute to your Roth or traditional IRA. In 2020, you can contribute up to $6,000 in your IRA accounts, or $7,000 if you're 50 or older. Roth IRA contributions are an option if you make less than $75,000 as a single filer or $124,000 as a married filer. There are no income limits on traditional IRA contributions, but your deposit may not be tax-deductible if you are also contributing to a 401(k).
Take care of the basics first
Your COVID-19 stimulus check is meant to be a stopgap to shore up your finances quickly. Use it to take care of the basics first, like paying rent or a mortgage and buying food. Once those are covered, rely on your future outlook to shape your next move. The less certain you are about your income going forward, the more important it is to pay down debt and hoard the cash. If you're feeling stable about the future, then go ahead and use the money to support your longer-term financial goals.