On Friday, March 27, 2020, President Trump signed the coronavirus relief bill.
The goal was to provide some relief and aid to certain impacted industries and American citizens who have been impacted by the economic shuttering caused by COVID-19.
As part of the aid package, the plan calls for a one-time direct payment of $1,200 to individuals with an adjusted gross income (AGI) of $75,000 or less or $2,400 for couples with an AGI of $150,000 or less. Also, an additional $500 payment will be made for each child.
However, there are restrictions. For individuals earning more than $75,000 or couples earning more than $150,000, the total amount you’re eligible to receive starts to decrease. For every $100 you earn over $75,000 (singles) or $150,000 (couples), the payment will be reduced by $5.
Therefore, if you earn $99,000 or more as an individual or $198,000 as a couple, you aren’t eligible to receive the stimulus check.
How to Spend Your Stimulus Check
How you should spend your stimulus check depends on your personal financial situation.
For instance, if you have a steady job that isn’t in jeopardy, how you spend the check would look differently than someone in the restaurant industry who was recently laid-off. Someone with a heavy personal debt burden should use their check differently than someone who is debt-free and has a large rainy-day fund.
You’ll simply need to use some common sense to decide based on your circumstances the best way to use your stimulus check.
However, here are few ideas that may be worth considering.
1. Use the stimulus check to purchase necessities
Needless to say, purchasing a new TV or set of golf clubs would not be the wisest way to use your check – for virtually for anyone right now.
“Free money” may be burning a hole in your pocket, but that doesn’t mean you should be wasteful – even if you’re still employed. If our economy slips into a recession, many Americans could face a higher risk of job loss or reduction in pay.
If you’ve lost your job or seen a reduction in your hours, using the $1,200 (or $2,400) to purchase necessities is obviously a good choice.
That doesn’t mean you should order a take-out steak dinner every night or even stockpile toilet paper in bulk.
However, using your stimulus check to purchase groceries, pay the rent or mortgage, and utilities is a perfectly acceptable way to use the money. Having extra money in the bank can help relieve financial stress induced by the shutdown. Especially, if you’re in the 60% of Americans living paycheck-to-paycheck, your stimulus check could peace of mind in uncertain times.
Just be sure the extra cash in the bank for next months rent or groceries doesn’t entice you to overspend or purchase luxuries you don’t need! When the coronavirus health pandemic subsides and the financial risk due to uncertainty subsides, you can then go purchase those non-essentials you want.
Until then, only spend your stimulus check on your needs if you are in a vulnerable situation.
2. Pad your emergency fund
If you’re not currently going through the storm, you should be preparing for one. Right now, we’re all weathering the economic and health crisis induced by COVID-19.
However, if you still earn a steady paycheck and have some savings, adding to your cash hoard could be a wise way to “spend” your stimulus check.
Cash is King: Emergency funds help you take back some control
During this crisis, we all have a feeling like we’ve lost some level of control over our lives.
Most of us are living under self-quarantine and “social distancing.” The government has forced business-owners to close down or offer limited services in attempts to slow the spread. This has caused over 3 million Americans to suddenly lose their jobs and wonder how they will make ends meet.
On this wild ride we’re enduring, having a cash cushion to weather the storm can help minimize any economic damage to your household.
Perhaps, you already have a small emergency fund in place. Adding another $1,200 or $2,400 could be a good start to having a fully-funded 3-6 month cushion.
Having 3 to 6 months of your average household expenses in cash reserves provides a source of income in case you lose your job. In the event you lose your job or experience a prolonged downturn in business, you can pull from this cash pile to help make you whole.
More than likely, 3 to 6 months of expenses is enough runway to provide time for you to land another job or for your business to turn around.
3. Pay down debt
Using your stimulus check to pay down debt could be a wise way to relieve some of your obligations and financial burdens.
Bad debt acts like a chain around your neck. It cripples your savings ability and robs from your future. Plus, having financial obligations during an economic and health crisis adds to already elevated stress levels.
If you have credit card debt, car loans, or other obligations, using some or all of your stimulus check to eliminate a portion of your debt balance could help free up future cash flow.
Before using your stimulus check to pay off debt, you may want to make sure you have your emergency fund in place. Under normal circumstances, using a windfall or unexpected bonus to pay down debt is a no-brainer.
However, these are uncertain and extraordinary times. No job is ever guaranteed, but many industries are especially vulnerable. Sometimes, saving any extra liquidity you can will pay dividends in the future.
If you’re in good financial shape, your job is relatively safe, and you have an ample emergency fund in place, using your stimulus check to pay off high-interest debt could be a great way to deploy the money.
4. Invest the $1,200 or $2,400 stimulus check
Depending on your personal situation, investing your stimulus money could be an opportunity to buy the market “on sale.”
However, never invest money you may need in the next 3-5 years.
Given the uncertainty and higher likelihood for job loss, it only makes sense to invest your check if you have sufficient cash to to survive ~3-6 months without an income. Preferably, stay on the higher end of this range in the current market.
If you don’t have a sufficient emergency fund or have high-interest debt, you may be better off saving the cash or paying down debt. Further, if you’re susceptible to lay-offs or don’t feel secure in your business, keeping as cash may be the most prudent choice.
However, if your financial house is in order, investing when the market is in Bear Market territory could be great for long-term wealth building.
Invest in your tax-advantaged retirement account
If you decide to invest your stimulus check, putting money to work in your Traditional or Roth IRA during the current market downturn could pay dividends in the future.
Given the stock market has dropped considerably (~35%) from all time highs, putting money to work at depressed levels could lead to outsized returns.
For many, retirement could be in the distant future. For those in their 20s, you could have four decades for stocks to compound. Even for those in their 40s and 50s, re-balancing or allocating your stimulus check to stocks could help provide longevity to your retirement portfolio.
By investing in a Roth IRA, your investment has the ability to compound tax-free over the decades. When you reach retirement age (59 1/2), 100% of the money is yours! You don’t owe Uncle Sam a dime.
With a Traditional IRA, you get a tax deduction on your contributions. The investment grows tax-deferred. When you pull the money out, you’ll owe taxes as if the withdrawals are ordinary income.
Both types of accounts have their merits. You’ll need to do your own research, but for most people, the Roth is probably the way to go.
Invest in a brokerage account
Again, investing should be for long-term money (3-5+ years).
Even though you can technically withdraw contributions to a Roth IRA, you should plan to lock this money up until you retire. However, if you’d like to have a little more liquidity or save for pre-retirement goals (home, new car, vacation), consider investing your stimulus check in a brokerage account.
With an ordinary brokerage account, you do not have the same tax advantages of an IRA or 401(k). You’ll owe taxes on any dividends and capital gains since their is no tax-shield on brokerage accounts.
However, brokerage accounts allow for incredible flexibility. You can access your money whenever you like. This provides for much needed liquidity during crazy times like we’re experiencing.
Having an emergency fund and a liquid brokerage account could help you sleep better at night knowing your financial future is not dictated by a sudden job loss.
Market returns over time
Historically, the overall market has averaged ~10% per year. This return includes drastic market declines spanning the Great Depression, the “Tech Bubble” bursting, and the Great Recession of 2008-2009.
Even including these sharp declines, investors’ money would have doubled approximately every ~7 years if invested in an S&P 500 index fund.
Remember the last recession?
The Great Recession of 2008 and 2009 was a trying time for our economy.
Banks were on the verge of collapse. Un-employment skyrocketed. Home-owners defaulted on their mortgage and foreclosures were rampant.
In the end, the Fed took many similar steps as they are taking today. They lowered interest rates, instituted “quantitative easing,” and the government bailed out the big banks whose risky mortgage-backed securities were in default.
In the end, the drastic steps to take control of our economy gone haywire worked.
While pretty much every investor lost money in 2008 (based on a ~37% decline of the S&P 500), the ensuing years provided a bull market for the ages!
As shown below, 2009 provided investors with a 26% return. The following year, another ~15%. After just a few years, investors recovered from a near economic collapse in the American economy.
COVID-19 could provide a similar bounce-back for investors
To preface, nobody knows what the market will do. Similarly, no person has the ability to predict when this worldwide pandemic will end.
In an effort to “slow the spread,” federal, state, and local governments have instituted policies that effectively limits citizens’ activities. This has obviously had an adverse effect on the economy.
Since people aren’t shopping and spending due to forced quarantining, businesses aren’t earning revenues. Therefore, they can’t pay their workforce and millions of employees are laid-off or furloughed.
While the coronavirus is a biological harm, the shut down of the economy is purely a government-imposed remedy in an attempt to save lives. When regulators inevitably lift economic repression, business will return. Although, it may time several months to recover fully.
Great companies will gain market share
No doubt, there will be casualties and businesses that do not return. Many businesses were facing economic hardships before the coronavirus. COVID-19 could just be the last nail in the coffin for these businesses.
Unfortunately, the negative economic impacts will have a disproportional impact small and medium-sized businesses. These family-owned or small companies may not have the balance sheet or liquidity to sustain a prolonged shutdown.
While the CARES Act attempts to alleviate much of the hardships with forgivable SBA loans, some smaller companies will still find it difficult to weather the storm and return to profitability. This is certainly devastating to an economy where small business is the backbone.
Large, public companies have the resources to survive
Despite the economic turmoil, there are large, public companies that have the resources to survive. As smaller or less capitalized companies go out of business, these large, public companies inevitably gain market share.
In retail, Amazon, Wal-Mart, and Target have shown resilience. Americans have relied on companies like these and Kroger to purchase essentials. As people are told to “stay home,” Amazon has certainly benefited from their online platform and delivery network.
This is not a recommendation to buy the stock of these companies. However, understanding how they are gaining market share or navigating the current crisis can be helpful in understanding how business consolidates during market turmoil.
5. Give to those in need
Perhaps, you’re in a position where you do not need the money.
You could be debt-free, have a large emergency fund, and a nest egg that secures your financial future. Congratulations! This is a great position to be in the current times.
Unfortunately, there are millions of Americans who are not in your situation.
You may be in a position where the best use of the money is to help out others in need. You may have family or friends who have lost their jobs. What if you could buy this month’s groceries for them? This stimulus check could be a unique opportunity to generously tip on a to-go order. You can give to your local church or charitable organization.
Difficult economic times provide a test of character. If you don’t need the stimulus money, you could consider giving some or all of the cash to those in need.
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