The much-anticipated stimulus payments have begun. Direct deposits began last week for some recipients, while others may have to wait as the US Treasury rolls out this massive program. The IRS website has a helpful FAQ page, where they refer to them as Economic Impact Payments or EIPs, and where you can learn if you qualify to receive one.
Whether you’ve gotten your payment already or are still waiting for it to arrive, you’re faced with the same question: what should you do with it? Here are some possibilities to consider depending on your situation.
It goes without saying that the COVID-19 crisis has created a lot of financial hardship. Your unique circumstances may call for you to use your payment to give yourself some breathing room or to pay bills that have already stacked up.
- If you’ve lost income or face increased expenses due to COVID-19, your stimulus payment is probably already spoken for. (Remember, too, that this situation may be exactly why you set aside an emergency fund. If your 2020 income is going to be lower than usual, it may even make sense to take some money out of your retirement accounts.)
- Maybe your situation isn’t that worrisome yet but could get worse. In that case, you might want to save your stimulus payment as a cushion against uncertainty in the coming weeks.
Strengthen Your Financial Foundation
What if your cash flow is secure? Maybe your job hasn’t been affected, or you’re retired and living off income that you feel is reliable. Strengthening your financial situation means less chance of financial distress if the economic slowdown eventually affects you or lasts longer than expected.
- If your emergency fund couldn’t support you for more than a few months, save your payment in a bank account.
- Pay down your credit card debt (or high-interest consumer debt, like furniture or car loans).
- Suppose you want to strengthen your emergency fund and pay down your debt, but your stimulus payment isn’t enough to do both? Don’t over-think your decision: just split it into two pieces and put some toward each goal.
- You can always use your payment to shore up other goals, like retirement or college funding. (Being a business owner, Ken keeps unexpected income to be prepared for unplanned expenses, like extra costs related to the team working from home.)
Spread It Around
Many people are fortunate enough not to need their stimulus payments for themselves. If you happen to be one of them, here are some ideas about how to use your windfall.
- Donate it to charity. During recessions, non-profit organizations often see a substantial reduction in financial contributions. If you don’t know which organizations to donate to, consider those responding to medical needs or food insecurity. (The Cleveland Food Bank is a favorite of ours.) For 2020, taxpayers who do not itemize can still deduct up to $300 of their charitable contributions.
- Give it to someone you know needs it. (Remember, if you give more than $15,000 of money and property to any one person in a calendar year, you’ll need to file a gift tax return.)
- Don’t forget your favorite brick and mortar shops; they’re probably selling online. If you don’t need anything now, you can support them by buying gift cards, either for yourself or to give to friends and family—maybe someone you know would appreciate a grocery gift card. (Britta’s helping her hairdresser by buying gift cards for both herself and a friend.)
- Invest in home repair and maintenance. Work on the exterior can probably be done while maintaining safe social distancing. This helps increase the value of your home for the future while providing employment in a down economy.
- Spend it on yourself. Whether you’re buying from a small shop or a major retailer, it helps to keep them profitable so they can continue to provide paychecks to their employees.
What Not to Do
Like any windfall, don’t treat it like ongoing income. It’s not the time for unplanned or unneeded major purchases, especially anything that increases your ongoing cost of living. Yes, there’s been talk of another windfall from the government. But as we’ve often said, if there’s anything less certain than what the stock market’s about to do, it’s what to expect out of Congress.
It's prudent to treat the stimulus payment as a once-in-a-lifetime windfall. If you’re not sure how best to apply it to your situation, please call us.
This content is developed from sources believed to be providing accurate information and is provided by Practical Financial Planning, Inc.. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided arefor general information and should not be considered a solicitation for the purchase or sale of any security.Original content of Practical Financial Planning, Inc. only is copyright © 2020 by Practical Financial Planning, Inc.