In my previous article, I outlined 5 Smart Ways to Spend Your $1,200 Coronavirus Stimulus Check.
Now, I want to outline exactly what I plan to do with my $1,200 stimulus check from the 2020 CARES Act. However, keep in mind that your situation may be drastically different than mine. For you, there may be better uses of the money. If you recently lost your job or are at higher risk of having your hours cut, you could be better off saving as much cash as possible in a high-yield savings account.
Depending on your circumstances, your stimulus check may be larger ($2,400 total if you’re married) or less depending on your household income.
However, no matter the size of your stimulus check or income, using your cash wisely during these uncertain times should be your main priority during these difficult times.
First, here’s some context on my current financial situation
My Salary
Thanks to the higher standard deduction of the 2017 Tax Cuts and Jobs Act, my adjusted gross income (AGI) is below $75,000.
As such, I anticipate receiving the full $1,200 for a single tax-payer when the payments are made in mid-April.
Employment Status
Currently, I work as a Certified Public Accountant (CPA) at a Fortune 500 company in the entertainment industry.
While my employer is heavily events-drive and the entertainment industry has taken a hit with all of the social distancing, my company has committed to prioritizing employee retention. Even with the uncertainty, they plan on still paying our annual bonuses this month (which demonstrates our strong financial position).
Plus, as a public company, my job as a CPA is fairly essential to ensure compliance in financial reporting and other accounting responsibilities.
However, even if I do get laid-off, CPAs are in high demand. I have ~3 years of Big 4 public accounting experience and another 1.5 years in industry on my resume. This means my work experience is in the sweet spot for the vast majority of opportunities. Obviously, a CFO with 25 years of experience would have a much tougher time finding similar opportunities.
My Monthly Spending
Overall, I am a fairly frugal person.
In the average month, I save ~30%-40% of my after-tax income. I try to create as much margin in my monthly budget as possible while balancing my spending on things and experiences that bring me value.
I live in Houston where the cost of living is fairly low. My rent and utilities are around $1,600 per month.
The next biggest line item in my monthly budget is my $720 truck payment. While I could have paid cash last year, I elected to finance the purchase over 3 years at a 2.2% interest rate. I sometimes struggle with this particular line item as I would love to be debt-free. However, the investing nerd in me believes I can generate better long-term returns by investing. For now, I like having the extra cash in the bank and brokerage account rather than having a small loan at a low interest rate.
To minimize my monthly food budget, I tend to cook more than dine out. However, on average, I do spend ~$275 on restaurants. I also spend another ~$250 per month on groceries in the average month. In total, I spend ~$475 per month in food costs.
In the average month, I spend another $450 on miscellaneous items. This includes a gym memberships, gas, insurance, and entertainment. Obviously, this can vary depending on the time of year or month. However, $450 is a good estimate.
Total Spending Summary:
Rent & Utilities: $1,600
Vehicle: $720
Food: $475
Miscellaneous & Entertainment: $450
Total Monthly Expenses: ~$3,250
What If I Lost My Job?
While my average monthly expenses hover around $3,250, I have the ability to lower discretionary spending (restaurants & entertainment) and could easily find another $200 in my budget if needed.
If I were to lose my job, I could apply for Texas unemployment benefits. Based on my salary, I would be eligible to receive the maximum state benefit of $521 per week. Further, if I lost my job due to COVID-19, I would receive an additional $600 per week thanks to the expanded unemployment provided by the CARES Act.
Therefore, the total unemployment benefit would be ~$4,485 per month. This is more than enough to cover my monthly budget ($3,250).
Emergency Fund
One of the biggest accounts that lets me sleep well at night is my emergency fund.
In the event I incur an illness or job loss, I have ~6 months of expenses in cash. Even if I had $0 coming in each month, I could live off my rainy day fund through the pandemic (hopefully). However, with expanded unemployment benefits, I would likely still be able to save ~$1,200 each month thanks to my lower lifestyle cost.
Further, I have a Health Savings Account (HSA) balance that would fully cover my annual out-of-pocket deductible. This provides extra financial protection. While this is separate from a true “emergency fund,” it still provides a source of cash for medical emergencies.
Other Sources of Cash
My investment philosophy is to invest for the long-term.
While I do not plan to touch my brokerage account for 5+ years, it does provide a source of cash in the even I need supplemental funds. In this account, I have another 4-5 months of living expenses despite the market downturn.
As a very last resort, I also have a Roth IRA. Because Roths are after-tax retirement accounts, IRS rules permit withdrawals of contributions without tax or penalty. However, touching any retirement accounts would be a very last resort (only to avoid bankruptcy).
My Debt Burden
Unlike many other individuals in their 20s, I’m very fortunate to have graduated college without any student loans. I have always done my best to avoid consumer debt. Carrying a balance on my credit card would be a cardinal sin, so I pay them off at the end of every month.
As I mentioned in my monthly expenses, I do have some debt.
In November 2018, I took out a $25,000 vehicle loan at 2.2% from my local credit union on a truck that was less than half my annual income. I could have bought the truck in cash. However, I ultimately decided I preferred keeping a portion of the cash I would have paid in a high-yield savings account earning nearly 2%. With some of the cash I would have used, I invested in my brokerage account for liquidity.
As of March 31, I still owe ~$14,000 on the vehicle loan, but this represents a relatively small portion of my overall financial position (and the vehicle’s fair value). In the event I’m forced to sell my truck, I would still be able to pull over $20,000 in equity out of the vehicle (based on the “private sale” value on KBB.com).
For now, I believe the potential for market returns represents a relative value when compared to paying off the loan. Therefore, I plan to use extra cash to invest rather than pay down debt. When the market inevitably bounces back, I will use extra cash to pay off the loan earlier to be debt-free.
Now, here’s my plan for the stimulus check…
Based on my financial situation outlined above, I plan to invest $500 in my Roth IRA for 2020. With the remaining $700, I plan to add to my brokerage account.
Under normal circumstances, I would invest any additional financial windfall (bonuses, Christmas or birthday gifts, etc.) in my Roth until I reach the max contribution. However, I want to further strengthen my access to funds just in case the current economic environment continues longer than anticipated.
I don’t anticipate being laid-off anytime soon. However, if the current economic shutdown persist into the summer and fall, there is a greater likelihood of lay-off or reduction in pay. I want to be in a strong financial position – just in case.
Investing the majority of the stimulus check in my brokerage account provides greater liquidity
In these uncertain times, cash is king. Liquidity should be prioritized. However, as I have nearly 1 year of expenses accessible, I’m comfortable with investing a portion of the stimulus check in my Roth IRA.
I believe that today will be a wonderful investing opportunity when I look back in retirement 40 years from now. That said, I also want to balance my retirement investing with other investing and financial goals.
The vast majority of my investment portfolio (>80%) is locked in retirement accounts. While this is certainly a wonderful problem to have, I don’t want to wait until I’m 60 years old to live the life I desire.
One of my financial goals in the new year was to increase my non-retirement investing and achieve Financial Independence and Retire Early (FIRE). While achieving FIRE will probably take ~15 years, this could provide a great time to allocate more of my investable capital to achieving this goal.
Liquidity & Accessibility Above All Else
I won’t receive the tax advantages of an IRA. However, investing in a brokerage account provides immediate access in the event I burn through my cash cushion.
While nobody knows when the market will bottom, I believe the risk vs. reward at 35% down from all-time highs offers a good entry point for long-term investors. Could the market decline another 10%-15%? Absolutely.
However, this wouldn’t be the end of the world. It would just mean the $700 turned into ~$630. Worst case, I could still have access to the vast majority of the capital. Losing money would not be ideal at all, but I think the market is much more likely to trade flat or up over the next 6+ months. When government-imposed bans on public gatherings and “social distancing” protocols are lifted (hopefully, in the summer or early fall), I believe the market will rebound as the economy regains steam.
Certainly, circumstances may change. However, if we continue “social distancing” and the shutdown stays in effect through summer, another stimulus package will probably be introduced. More than likely, future stimulus payments would be made. Unemployment benefits would more than likely be further expanded as well.
My Goal for the $1,200 Stimulus Check
Ultimately, the stimulus check will not change Americans’ lives. For many (including me), it won’t even pay 1 month’s rent. However, for many Americans, the extra cash could go a long way in putting food on the table or paying the electricity bill.
Fortunately, I am in a financial situation where I don’t NEED the money. I have a stable career with a low lifestyle. Further, I have accumulated a solid emergency fund and have access to other funds.
However, even in investing the stimulus check, my goal is still to be able to access the funds if things go further south. Therefore, investing the majority in my brokerage account provided the the best choice given my goals.
Sure, investing the money is more risky than holding in cash.
However, the market has already taken a beating and I believe today’s prices offer compelling value even if we enter a recession due to COVID-19.
Remember, you must consider your own financial situation and risk tolerance before investing. Seeking the advice of a professional could go a long ways in tailoring a financial plan conducive to YOUR goals.
In the end, my financial situation provides the flexibility to invest my $1,200 stimulus check.