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If you were to see an advertisement offering tax-free money as long as you were willing to stay at home and quarantine yourself, it would be understandable that you might be a bit wary of such an offer. In any other circumstance, you wouldn’t be wrong to be concerned.
However, in this very unique situation we find ourselves in due to the COVID-19 virus and its transmission potential, some of the things that we normally take for granted, like hugging our friends, going to the gym or the movies, or even visiting our local bank branch, have become challenging obstacles. So when the Government decides to respond to these circumstances by offering tax-free payments to individuals and couples (many of whom have lost their jobs either temporarily or permanently), somehow it just makes sense.
Here are the facts about the stimulus payments straight from the IRS:
- Any American whose income is $75,000 or less for single taxpayers, $112,500 or less for Head of Household taxpayers, or $150,000 or less for joint married taxpayers will receive a payment of $1,200 per adult and $500 per child under 17 years old.
- Taxpayers who have their bank’s direct deposit information on file with the Internal Revenue Service (this generally happens when you are due a tax refund from the IRS) will receive their payments first, followed by everyone else who will be mailed a paper check.
But, you don’t need to wait until you receive it to plan out how to use your stimulus payment.
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Plan #1 – Use Your Stimulus Payment as Emergency Savings
Having funds available for emergencies is necessary if we want to avoid consequences like unforeseen debt, late payment fees, and credit problems. No one is immune from the possibility of having an emergency so having money set aside in advance can give you freedom from worrying about how you would respond financially.
Many financial professionals recommend having the equivalent of 3-6 months of living expenses saved for emergency use.
Don’t just deposit your money in a traditional savings account either. You should look for a savings account that has a higher than average interest rate while still keeping your funds easily available. For example, you would not want to put your emergency savings in a Certificate of Deposit account even if it has a high-interest rate because your money would be frozen for several months to several years depending on the terms and any early withdrawal would be charged a penalty.
Plan #2 – Pay Down Debt With Your Stimulus Check
$1,200 or $2,400 could make a dent in your debt leading to a significant reduction in the amount of time it takes to repay your debt in full and the total interest you will pay over the life of the debt. For example:
If you start with:
- Debt Balance: $4,000
- Annual Interest: 11%
- Minimum Monthly Payment: $100
- Repayment Time w/o stimulus payment: 51 months
- Total Interest Paid w/o stimulus payment: $1,006
If you apply your $1,200 stimulus payment, you then have:
- Repayment Time w/$1,200 stimulus payment: 33 months
- Total Interest Paid w/$1,200 stimulus payment: $451
By using the full $1,200 stimulus payment toward repayment of the balance in this example, you would save 18 months of payments and $555 in interest!
If you want to see how much using the stimulus payment can help with your debt, there are many free debt calculators online including ones at bankrate.com and credit.com. This stimulus payment could provide you with the opportunity to be debt-free earlier than planned – truly the gift of a lifetime!
Plan #3 – Invest the $1,200 Stimulus Payment
Yes, it’s true that the value of investments like stocks and mutual funds are lower than they have been in previous quarters. Therefore, you might think that presently it’s a bad time to invest. If you subscribe to the philosophy of Dollar Cost Averaging, however, then there is no bad time to invest, especially if you are someone who invests over the long term. The reason is that some of the same stocks and mutual funds that have low value can also be less expensive to purchase than in an average market but would still have the potential to grow in value as the market grows. If you decide to sell your investments before you actually need the money (think retirement) you may miss out on the potential earnings that may be achieved over time.
Plan #4 – Buy Local or Donate the Funds to Charity
With local businesses facing significant economic hardships as a result of customers having to self-quarantine, one opportunity to help is to consider putting your stimulus payment back into the local economy where you live. One way to do this is to consider buying gift cards from a local business to be used after the quarantine is lifted. Another way is to purchase food or gifts for delivery from locally-owned or small merchants only. If you would rather have your payment be used for people (or animals) affected by the shutdown, there are many reputable charities who would welcome your contribution.
Start or add to your emergency savings fund
Use your stimulus payment to start or add to an emergency savings fund. Check out savings account rates at online financial product review sites like bankrate.com and nerdwallet.com.
Pay off your debt
Consider contributing your full stimulus payment towards repaying your debt. Check out online calculators to find out how much time and interest you could be saving.
Invest your payment
If you are debt-free and your emergency savings fund is fully funded, you may choose to invest your stimulus payment. Make sure that you know your risk tolerance ahead of time and that you choose investments (or ask a licensed investment advisor to choose investments for you) that have diversity (not everything is invested in just one or two things) and low fees.
Use it to help others
If you want to use your stimulus payment to help other people, buy locally or donate to a reputable charity.
About the Author
Dawn Torres-Gale, AFC
Accredited Financial Counselor
In 2008, Ms. Torres-Gale was chosen by the Financial Industry Regulatory Authority (FINRA) Foundation to be part of a select group of military spouses. Through this, she received FINRA sponsored training from the Association of Financial Counseling, Planning and Education and became an Accredited Financial Counselor® in February 2012.
Full Bio | Connect With Dawn | LinkedIn
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