What Should Teachers Do With Their Stimulus Check?

As I write this, many Americans are about to receive a second round of stimulus checks from the federal government.  The goal from the government’s perspective is to get those dollars into the economy and encourage spending to prime the wheels of an economic recovery.

For those of you receiving checks, this might mean an opportunity to make progress in your finances that you have been looking for.

Being strategic is key.  And having the logical part of your brain make the decision instead of the emotional part of your brain which leads us astray many times is crucial.  Because it is so easy to have your emotions take over it’s important to decide how to use the money BEFORE you receive it.

Below is one way to think through the process.  And by the way, we are specifically talking about stimulus checks here, but this is just as applicable to other instances of receiving sudden money like an inheritance or bonus check.

Necessities

If you are struggling with paying your bills, feeding your family, and paying for medical expenses like so many Americans because of the current economic situation or Covid related items, this of course is where you should put the money.

Along those lines, if other government help like unemployment insurance is keeping you afloat and there is a chance that the necessities might be an issue when those helpful programs end, then parking these dollars in cash at the ready when down the line you again might need it for necessities is probably a good idea.

High-Interest Debt

If you are not in the above scenario then you can begin to think in terms of, “How will these dollars best put me on the path of future financial success?”  

Paying down high-interest debt like credit cards is probably the place that gives you the most bang for your buck.  If you pay down a credit card with 13% interest (or more!) and not having to pay that interest in the future, this is the equivalent of getting a 13% guaranteed rate of return on your money.  For those of you who don’t know much about investing and potential rates of return, that is an awesome return!

Emergency Savings

If you have credit cards and other high interest debt out of the way, beefing up your emergency savings is a good next step.  A good rule of thumb is to have three to six times your monthly expenses in a separate account set aside for true emergencies.  Most Americans have no way near this amount.  

If you have had to spend down your savings because of the economy, now is a great time to start to replenish it.  And if you are like most Americans who have trouble keeping more than $500 in your savings, you now have an opportunity to more than double that!

Invest for growth

The next place to look is your long-term savings.  The dollars like these for retirement and/or other long-term goals should not be put into a zero-risk savings account, but instead invested for growth.  For most, this means investing in the stock market in some form.  Once you decide to go the route, there is still a decision on what type of account to use.

Putting your money away into a Roth IRA earmarked for retirement is the first place to begin.  As long as you have earned income of the equivalent amount you may contribute up to $6,000 per year into a Roth IRA.  ($7,000 if you are age 50 or over.) These dollars will be invested and earnings will be tax-free at retirement when withdrawn.  Putting your stimulus money away into this type of retirement account is a great start on your way to building your retirement funding.

If you are already maxing out your Roth IRAs then investing for growth in a taxable investment account can also be appropriate.  Even though these dollars will not grow tax-free like the Roth IRA, based on the current tax rules most will still get to pay more attractive tax rates on capital gains and dividends than ordinary income rates.  Additionally, because these dollars are not in a retirement account, you have access to them before age sixty, so you are able to use these dollars before retirement.

Splurge - strategically

Spending your money isn’t necessarily a bad thing.  Especially if you have checked off all of the above items.  But, being strategic is still smart.  

First, if you are still not where you want to be with the above-mentioned items, spending a small amount like 20% and putting the bulk into getting your finances strengthened can be a fine strategy.  It allows you to move toward progress and get some unexpected wants at the same time.

Second, if you are going to spend the money, you might as well spend it on something that will make you happier in the long run.  Research shows that spending money on experiences instead of stuff usually makes people happier.  Finding ways to use the money that saves you time can be another way to get the most out of your spending.  Studies also show that giving money away can be more satisfying than spending money on yourself.  During a time of the pandemic, high unemployment rates, and tough economic times you might find helping someone down and out can be just what the doctor ordered.

To restate again, if you find yourself in a time of sudden unexpected money, (not just receiving a stimulus check) the above framework can be helpful to make sure you are using the money in a way that is best for you.  There can be other things to consider and your specific situation is unique so what is best for one person isn’t necessarily the best for you.

If you need help thinking through these types of decisions, this is one of the many things we do.  Don’t hesitate to reach out to get help.