During all the turmoil and upheaval of COVID-19 in the U.S., a bright spot has been the stimulus checks issued by the government. The extra money has been helpful to a lot of people, so I want to give you smart ways to use your stimulus money.
This prioritized list is based on the Financial Security Steps, to help you move toward financial freedom and use the money strategically. You can also follow these steps any time you receive unexpected income, like a work bonus, tax refund, or another windfall.
Are you getting the third stimulus payment?
Kiplinger has a handy calculator to check if you are eligible for the third stimulus payment AND how much it should be.
You can also use the IRS’s Get my Payment feature to get an estimate of when you should receive the money.
You are eligible for the third stimulus payment if the Adjusted Gross Income (AGI) on your last filed tax return was:
- Less than $75,000 for a single taxpayer (phased out completely above $80,000)
- Under $112,500 for a head of household (phased out completely above $120,000)
- Less than $150,000 for a married couple filing jointly (phased out completely above $160,000)
*”Phased out” means that the stimulus payment is gradually reduced for single taxpayers with AGIs between $75,000 and $80,000, and so on. A single taxpayer earning over $80,000 is not eligible for this stimulus payment.
1. Use your stimulus money to cover necessities
If you’re experiencing ANY financial instability, definitely use the stimulus (or any unexpected income) to cover necessities. “Instability” could mean a job loss or the loss of a loved one. During hard times, your bigger goals are less important than just meeting the needs of daily life.
- Shelter (rent, mortgage)
- Utilities (electricity, water, etc.)
- Food (enough to stay alive, don’t worry about stocking up on sale items or dining out)
In times of extra uncertainty, feel free to save a large portion of your stimulus payment as protection against future problems. I would rather delay debt payoff in favor of a little safety. If this prevents you from taking on additional debt in a few weeks, that’s perfect.
2. Get current on bills
If you have the basics covered, focus on getting current on any overdue or outstanding bills. This does not include accounts with a payment plan established that you are up to date with.
Pay down or pay off:
- over due bills
- any single bills, like a smaller medical bill, that is due
- an accounts you are behind on
If you have accounts in collections, this influx of cash may give you bargaining power with the collection agency. Offering to pay $1400 in cash today could get the agency to agree to write-off the remaining balance. It’s worth a try to get out of that debt.
3. Have a little fun
Note that I said “a little.” Set aside a small amount, that you & your partner agree upon, for something fun. It could be $50 for the family, $20 per person, or $200 per adult; use whatever figure fits your budget and doesn’t set you back too far.
I think having some kind of reward is crucial to staying on track financially, but it’s not always possible to budget for bigger items on a monthly basis. Using unexpected income for a smaller frivolous purchase will actually help you stay focused on your bigger goals.
My husband is putting his “fun money” from this stimulus payment into his savings account. He’s still working toward purchasing ridiculously expensive binoculars. I think I’m going to put my portion toward debt because I’m obsessed.
You could also use the money for a nice dinner, a toy or game for the whole family, or a short weekend vacation. Find a way to reduce the stress we’ve all been under or make your people a little happier.
4. Pay off non-mortgage debt
Hopefully, you’ve created a debt payoff plan so it’s easy to figure out where to put this extra income. Just pay toward the next debt in your plan. If you don’t have a debt plan, check out Your Streamlined Debt Plan for guidance.
If you’re lucky, the stimulus payment might pay OFF a debt. That’s definitely worth celebrating (see number 3).
5. Invest your stimulus money in a retirement plan
If you’re current on bills and out of debt, congratulations! That’s an amazing place to be.
Put the unexpected income in your retirement savings if you are not:
- on track to meet your retirement goals or
- not investing 15% of your income in retirement
Since this isn’t a planned contribution, make sure it won’t put your annual contribution over the limit for the type of account used. This table of retirement account types & limits will help you ensure you don’t contribute too much.
6. Save for your next big purchase
Get ahead by using unexpected income to save for big planned purchases, like a home improvement, downpayment, or a new vehicle. Improving your future life is always a smart way to use your stimulus money.
7. Invest the money for your children
Sorry kids, but you’re last on the list. Of course, I would love for every child to enter adulthood with a savings account and a paid-for college education, but that’s honestly not practical for a lot of families.
The harsh reality is that your kids can get loans or a job to pay for college. No one is going to loan you, as a senior citizen, money for living expenses and you may not be able to work enough to support yourself.
That’s why saving for your children is so far down on the list. They will have other options when they need the money later, but you won’t. Your retirement savings are your best option for security in your later years.
8. Pay down your mortgage
Assuming you’ve met all these other financial goals, use your stimulus money to pay down your mortgage. Having a mortgage-free retirement home is a great goal, but definitely last on the list because there are other options that make a greater difference in your financial future earlier.
Smart ways to use your stimulus money for a disabled child
One exception to this priority list would be a child with significant developmental or physical disabilities. If you anticipate supporting your child, due to their special needs, or if your child has large upcoming expenses, saving for them should be moved up the list.
I personally put saving for a disabled child in the number 4 position. Right now, we don’t have any big non-insurance expenses coming up, luckily, so we are paying off debt with most of our stimulus check.
If we were not currently ahead-of-plan on retirement savings, I would invest the stimulus money in a retirement account. We plan to use retirement savings to support my husband, my then-adult daughter, and me during retirement, so we invest more than recommended to prepare for that day.
Another option is to establish or contribute to an ABLE account, a special tax-advantaged savings account for people with disabilities that allows them to still receive assistance like Medicaid or Social Security. There are different programs from each state and many different rules, so you’ll need to invest time in researching your options.