Make the Most of Your Stimulus Check
Many Americans are set to receive money from the government in the form of a third stimulus benefit. Plan now to use this money wisely - pay bills, pay down debt, and save for emergencies.
Stimulus payments will be distributed as checks or direct deposits. The amount is based on income and family size. The American Rescue Plan directs the $1,400 direct payments to individuals earning up to $75,000, but cuts off eligibility for single people earning more than $80,000. For couples who file a joint federal income tax return, the phase-out begins at those making $150,000 and ends at $160,000. People who file their taxes as head of household will receive the full $1,400 if they earn less than $112,500, while the payments will be cut off for those earning more than $120,000. Most families will get $1,400 per individual from the third stimulus check. An additional benefit for families with children is the increased child tax credit of $3,000 per child.
If you didn’t get any Economic Impact Payments or got less than the full amounts, you may qualify for the Recovery Rebate Credit and must file a 2020 tax return to claim the credit even if you don’t normally file. Visit https://www.irs.gov for more details.
Wondering how you should spend this windfall income? Here are some things to consider:
- Pay down debt. Return on investment rarely outweighs interest and fees paid on outstanding debt. Pay off or pay down debts before considering investment opportunities.
- Catch up on bills. Late payments can lead to poor credit scores, late fees, higher interest fees, or even repossession/foreclosure. If you have overdue or late bills or have had trouble making ends meet, use part of all of the stimulus check to pay bills.
- Increase emergency savings up to at enough to cover at least two months of expenses. A basic requirement for financial stability is an emergency savings fund to cover 2 to 6 months of expenses. Use part or all of your stimulus check to start or increase your emergency savings fund.
- Pay additional to mortgage, auto, or other loans. Savings over the long-term usually add up to more than one would earn in a low-risk investment. Paying additional to the principal of a loan saves money in interest over time and pays off the debt sooner, leaving future income for other uses.
- Save and invest for the future. Examine life goals and put extra income to work for you.
- Save for a down payment. Dreaming of homeownership or some other major purchase? Use the stimulus funds to start or add to saving for a down payment. The larger the down payment, the less you will pay in interest over time. A large down payment also helps you avoid the cost of gap insurance or PMI (private mortgage insurance). Already have a mortgage-free home? Protect your investment by taking care of needed repairs and home maintenance.
- Increase retirement savings. Planning for a secure retirement some day? Use stimulus funds to start or increase retirement savings through your employer provided fund, IRA/Roth IRA, or some other reliable retirement investment. With a Traditional IRA, the money is taxed when you take it out. With a Roth IRA, taxes are paid before you deposit into the Roth IRA account. Because stimulus checks are taxable income, your money is tax free. IRA contributions are limited to $6,000 per year if you are younger than 50 and $7,000 if you are age 50 or older.
Were you one of the many unemployed or underemployed in 2020? Consumers who faced job loss may still be trying to make ends meet. The stimulus check can help you get back on solid ground financially. Prioritize bills and use your stimulus money to get up to date. Missing and late payments keep racking up extra costs and can ruin your credit score or result in repossession or foreclosure. Use part or all of the stimulus money to build up an emergency savings fund that will help cushion you from financial distress in case of continued income loss or an unexpected expense such as a car repair. If you are doing okay financially, consider using the stimulus funds for professional development to add new skills to your resume and improve your chances in the job market.
Got a steady job and caught up on your bills? If you are financially secure - little or no credit card debt, easily paying all monthly expenses, have an emergency savings fund, and have stable income – use your stimulus check to build wealth. Make additional payments toward the principal of a loan – you’ll shave months or years off of the life of your loan and save money in interest. Start or increase your retirement savings. Take advantage of the magic of compounding – interest accrues and is added so that the investment grows over time. Older adults may be late savers in the retirement game and can use the stimulus to catch up. Young adults have time on their side and can watch even a small retirement investment grow over time. Check with your employer provided retirement fund or start an IRA (traditional or Roth). You might also consider giving all or part of the stimulus for charity. Even if you don’t itemize, you can take a deduction for up to $300 of charitable donations for an individual and $600 for married couples filing jointly.
Feeling financially stable and want to use your stimulus check for your kids? Consider starting a college savings plan. One option is a 529 plan – an investment fund for college. The Arkansas 529 GIFT Plan account can be used for any eligible college, university, trade or vocational school. Before choosing a plan for your child, make sure you understand the fees, costs and terms associated with the plan. Know who can use the funds and what types of educational expenses qualify. Open savings accounts for your kids. Use the accounts to teach them about money management. Teens and older children may benefit from learning to manage checking and savings accounts or make small investments. Or you may ear-mark your stimulus funds for other kid-related expenses like summer camp, music lessons, drama class, sports, study abroad, or college-prep programs. Invest in creating family memories by using part of your stimulus funds for a special family activity. Want to help your adult children? The annual gift exclusion amount for 2021 remains at $15,000. You can give each child or grandchild up to $15,000 without federal tax consequences.