Just before we closed out 2020, President Trump signed a $2.3 trillion COVID-19 relief bill. Along with some funds for small businesses and the unemployed, the bill also included a second round of stimulus checks to follow up on the $1,200 payments sent out earlier in 2020. This time around, if you make less than $95,000 a year, you should qualify for up to $600. Families should also receive an additional $600 per child.
The Treasury isn't wasting any time distributing these funds, either. If you were paid electronically in the previous round of stimulus payments, you may already see the money in your account. Otherwise, paper checks and debit cards should be on the way by mid-January. Now the onus is on you to formulate a plan for using that stimulus money wisely. Here's a prioritized list to help you strategize.
1. Pay the rent
If you're struggling to pay your bills at this point and you can't move in with family, your stimulus money might be best spent on the rent. Admittedly, this can be painful. The $600 probably doesn't cover a single month, and you may already be behind in your payments. But it's also a show of good faith to your landlord, who may soon have the power to evict you.
You may remember that the Centers for Disease Control and Prevention (CDC) and Department of Health and Human Services had previously suspended evictions through the end of 2020. This latest COVID-19 relief legislation extends that suspension until the end of January.
Some states have also enacted their own eviction protection. For example, until May 1, New York has banned evictions of tenants who've experienced COVID-related hardships. And if you live in Oregon, you may be safe from eviction until June 30. Other states have no specific protections or have set their eviction bans to expire sometime between now and March.
The end of eviction protection could lead to some uncomfortable conversations with your landlord over the next several weeks. If you're behind on the rent, address it with your landlord proactively. Having your stimulus money on hand gives you something to offer as part of that conversation.
2. Pay down high-rate debt
If you are covering your rent and other bills with another source of cash, consider using your stimulus payment to pay down high-rate debt. Any balances with an interest rate of 10% of more are good targets.
The average interest rate on credit card debt is 16.43%. At that rate, a $600 balance can take nearly 10 years to pay off with a 2% minimum payment. In that time, you'll pay interest of about $565. That essentially means the stuff you bought on that credit card will cost you almost twice as much by the time you pay off the balance.
Pay off $600 now and you spare yourself those interest charges. And if $600 is enough to close out a single account, you'll also free up some cash in your budget by eliminating the monthly payment.
3. Save the stimulus payment as cash
If the rent and other bills are covered and you don't have much debt, evaluate your emergency fund balance. The purpose of your emergency fund is to keep you from borrowing money if your income dries up or something else unexpected happens. You should have enough cash on hand to cover three to six months of your living expenses. You'd target the higher end of that range if you have high insurance deductibles or any reason to be uncertain about your job.
If your cash reserves are inadequate, save your stimulus check to your emergency fund. You can always reassess your cash balance later and move money to your investment account once you're feeling more financially secure.
4. Send the stimulus payment to your IRA
Finally, if you are paying the bills and comfortable with your cash and debt levels, save your stimulus check to an IRA. These retirement accounts allow your contribution to grow tax-deferred or tax-free depending on the type of IRA you choose. Without year-to-year taxes to worry about, your $600 could double in value about every 10 years, assuming it's invested to grow at the stock market's long-term average of 7% annually.
You have options
By itself, $600 won't pull you out of financial despair, but it does give you some options. Put it toward your rent if you are worried about keeping a roof over your head. Otherwise, look for ways to increase the value of that $600 by sidestepping future interest charges on your debt, preventing new debt by improving your cash reserves, or investing for the long term.