The CARES Act added an extra $600 in weekly unemployment benefits to all recipients' checks during the COVID-19 pandemic to help them get by until they could return to work. This means some people are actually earning more while they're claiming unemployment than they could working their normal jobs.
Everyone is rethinking how they manage their money these days, and if you have a little more money than you're used to right now, you'll have to decide how to best use those funds. Here are a few suggestions worth considering.
1. Prepare for higher taxes this year
If you're earning more this year than you're used to making, you will likely also have a higher tax bill. You may receive a smaller tax refund than you're used to, or you could even owe money to the government. Planning for taxes now can help you hold onto more of your money and reduce how much goes back to the government.
Keep an eye on your income as the year continues, and try to estimate which tax bracket you'll fall into. If you're nearing the top of your current tax bracket, you can put money in a tax-deferred retirement account to keep yourself in the lower bracket, so you'll pay a small percentage of your income in taxes. If you're worried about owing taxes, you may want to keep a little money in a savings account, either as part of your emergency fund or separately, that you can use for this purpose if necessary.
2. Build an emergency fund
An emergency fund helps keep you out of debt when unexpected expenses, such as a hospital bill, an insurance claim, or a broken appliance, arise. It should be your first financial goal after paying off your bills each month, especially now with the near future looking so uncertain and a second wave of COVID-19 possible.
You should aim to save at least three months of living expenses in your emergency fund, or six months if you're able to. You can choose to only include the essentials, like your rent or mortgage payment, utilities, and grocery costs, but know if you're forced to rely on these savings, you may have to give up extras, like streaming services. Or you could include these extra costs in your emergency fund from the start. If you have a high-deductible health insurance plan, make sure your emergency fund contains at least enough to cover this deductible unless you're saving for this separately in a health savings account (HSA).
3. Pay down debt
Putting any extra money you have left over every month toward debt repayment can make managing your finances a little easier going forward. Make a list of all of your debts and note their balances, minimum payments, and interest rates. You must make the minimum payment on all of your debts in order to avoid late fees, unless you're enrolled in a COVID-19 hardship assistance program that enables you to defer some payments right now.
Put any spare cash toward the debt with the highest interest rate if you want to get rid of your debt more quickly. When that's paid off, move onto the debt with the next-highest interest rate, and so on. If you have credit card debt, you can also try taking out a 0% introductory APR card to temporarily halt your balance growth. Avoid charging new purchases to your cards, if you can help it, until you are able to pay off your debt.
4. Put the money toward some of your long-term goals
If you have an emergency fund and no debt, put your extra money toward some of your long-term goals. You might be saving up to buy a new car or to make a down payment on your home, and you probably hope to retire someday, so you'll need money for that, too. You can spread your extra cash around between several goals if you'd like, but it will take you longer to achieve each of them this way.
Putting money away for retirement could help you save on your taxes this year, too, if you use a tax-deferred retirement account, such as a traditional IRA or a 401(k). Money you put into these accounts lowers your taxable income for the year, though you must pay taxes on the money when you take it out in retirement.
How you choose to spend your extra cash right now is your call. The tips above are suggestions that can help you improve your financial security going forward and reach your long-term goals, but you may have other ideas for your funds. That's fine, too, as long as you remember that not all of that money is yours to keep, and you make sure to prepare yourself for the larger tax bill that comes along with your larger income.