This week we’re talking about the latest round of stimulus checks and what are good ideas on how to use the money.
As of this publication (3/26/21), the IRS is in the process of sending out stimulus checks with a pay date of 3/24/21. So the rules of this; Congress is providing checks with an adjusted gross income (AGI) of $80,000 or less and joint filers making under $160,000. (This includes babies who are born anytime in 2021 that can be filed in 2022)
In addition, if you're a parent of a baby born in 2020, you may be eligible for an additional $1,100 if you did not receive the first two payments for your new dependent last year. Oh baby!
If you qualified for a stimulus check but did not receive one, you can claim this when you file your 2020 tax return. So be certain to speak with your tax preparer so that you can work to get your money.
You can also go to the IRS’s Get My Payment tool to check your status.
Now if you can’t claim your children on taxes then they’d receive a stimulus check. Per the IRS to claim your child as your dependent, your child must meet either the qualifying child test or the qualifying relative test: To meet the qualifying child test, your child must be younger than you and either younger than 19 years old or be a "student" younger than 24 years old as of the end of the calendar year.
Adding Money to the Budget
Let’s take a scenario and say a family of four is making under $160,000 AGI. This means that $5,600 ($1,400 per person) will be sent out. So the proverbial question is . . . “what should I do with the money?” This is a tough question to answer as each individual’s situation is different. Let’s break this down situationally.
If You’re in a Financial Bind
The main goal is to keep the foundation in place meaning try to refrain from missing premium payments for auto, life, health, and homeowners insurance. These are important items if an unforeseen incident occurs.
So here are some other items that you can manage:
Food and Shelter: Refrain from using the money to pay for food, rent or mortgage: Seek assistance from a food bank. In addition, speak to your landlord or mortgage company to workout payment arrangements. In addition, the White House is seeking to extend the federal eviction moratorium.
Student Loans: Many peoples face costly student loans. Thankfully, the CARES Act provides some relief to federal loan borrowers meaning principal and interest payments on federally held student loans are automatically suspended through September 30, 2021.
Credit cards: speak to you card issuers and explain your situation and it is important to correspond with them before you go into default. There is a good chance they may defer payments, interest and late fees. Ideally, seek to get an extended payment plan. If all else fails, make the minimum payment and use the rest of your money towards keeping the lights on and insurance paid for.
Automobile payments (consumer loan): many lenders have allowed payments to be delayed as well as late fees. Be careful and get your agreement in writing. In addition, if you have a high interest rate or have a few years or less on your term, seek to refinance as this can lower the payment due to the interest reduction and potentially a longer payment cycle. If and when you get back on your feet, work to pay it off more aggressively.
Other Services to Consider
Work with your utility companies so that you have electric, gas and water. Other options are changing your cell phone plan, cancelling your gym membership, music services, and cutting the cord for the cable bill.
Whatever the service is, consider cancelling or cutting back. Another idea to consider is to trade for services with businesses in the community. This was common during the 2008 financial crisis. For example, perhaps your hair stylist will give you a fresh cut for a gutter cleaning or screen repair.
What if I Can Pay my Monthly Bills?
Okay cool! I have $5,600. Should we take the kids to Disney world? Can I get that new car that I’ve been wanting. Should we go out for a night on the town? Seeing that we are the ones running this show, we’d tell you that this is not the right course of action. It is one thing to be in the fortunate position of keeping the roof over your head; however, it is another to ignore your budget. Approximately 85% of the population will receive a stimulus check and seeing that about 67% of people do not budget according to many surveys there is a good chance most people have some form of debt that could get some attention.
What about paying down that mortgage balance? This is a good idea in theory as mortgage interest over time may be the most money that people payout to creditors in their lifetimes; however, there are more viable options.
Seeing that interest rates on most homes are 3.5% - 4.5% based on estimation, you can theoretically make more interest on your money in the stock market either individually or through a retirement plan. David and I consistently peg the 7% goal and this means that you could double the interest. We talked about this in Podcast #9, Should You Pay the Mortgage off Early or Invest It in Your Retirement. In that episode we provide a full breakdown on the math.
Credit cards are toxic debt. They’re always just taking on interest and if you make only the minimum payment while continuing to charge on them, they never go away. Hence, if you have debt with this type of vehicle there is no sense in working on the mortgage payment. Go for that high interest credit card debt! The best path is to consolidate that debt if you have not done so, is to lower interest the rates which can be low as 0% for a prescribed number of months. If you can’t consolidate to the level you’d like, then knock off the cards that are charging the most interest. You can also listen to Podcast #3 regarding credit card consolidation.
Rainy Day and Emergency Funds
If your debt is in check or manageable, then consider putting your money towards rainy day and emergency Funds if they’ve not reached the goals that you’ve established. If you need to create these, the rainy day is for unforeseen expenses. This is an arbitrary amount; however, we’d recommend $2,500; however, this is based on your situation meaning assess your budget and come up with a number that is feasible.
The emergency fund is designed for when you can’t work due to a health related issue, job loss or an inability to work. Most experts say 3-6 months of expenses is a feasible measure. It depends on your ability to find a new job; however, we can’t predict our future health so plan accordingly.
Here’s some food for thought: according to PurePoint Financial, if you saved 10% of your take-home pay per year, it would take five-to-seven years to accumulate six to nine months of salary, and that’s without touching it.
If you have large amounts of debt, work to pay that down; however, if you have little-to-no savings, look to find a balance by paying off debt and while setting money aside for the unplanned events.
Invest in Your Retirement
If you are fortunate enough to be in a position where the budget is in good shape, then this where you have options. A very beneficial move here is to increase that tax-deferred account, namely, your 401(k) If it has not been maxed out yet. If you are under 50 years of age that number is $19,500 (as of 2021) and you can add another $6,500 if you are over 50. (Catch up contributions).
When you invest tax-deferred, this reduces your tax liability to the government. If you choose the Roth route or Roth 401(k) this is after-tax investment so when you take it out (as long as you meet the qualifications for distribution rules) you won’t pay tax on your gains.
If you happen to be in the position where you’ve maxed these investments the option exists to invest in a traditional IRA which is $6,000 for under age 50 (as of 2021) as well as an additional $1,000 for those of us over the age of 50.
Let’s Do the Recap
If you are eligible to receive a stimulus check this is free income from the government that is tax-free.
The question is what will you do with it. If you are in dire straits, we recommend that you use this stimulus money for items that protect you such as premiums for insurance coverage such as health, life, home and auto. Then work for payment arrangements with credit card companies, rent/mortgage, consumer loans such as a car payment, utilities and medical bills. If you have other forms of money available at your disposal, use that for your day-to-day living.
If the bills are in manageable shape, then look to pay down debt namely credit cards. This is the worst debt that you can have so get that in shape and look to consolidate this money if you can. In tandem, look to build out the emergency fund and rainy day fund if you haven’t met those goals. You will be doing yourself a huge favor`
If your debt management is in place, up your retirement savings or build out additional investments in other places. If possible, look at this as a bonus that is tax-free. Be smart and put it to good use and you’ll thank yourself later.