What Should We Do With Our Stimulus Checks?
You looked at our checking account this morning and ::POOF:: saw a deposit of $2,900 just dropped in out of nowhere.
Well, word on the street is we might be getting stimulus checks as early as this week so that may or may not be something that happens by this Friday. No worries if it hasn’t yet because eventually it will happen. Per my understanding, if your Adjusted Gross Income is below $150k, you will be getting $2,400 as a couple married filing (taxes) jointly. Then they tack on another $500 – thank you, Nolan! But the other $500 for Knox might not be applicable because our 2019 taxes are just got filed earlier this week.
Sidenote: The high-level details of the $2.2 trillion dollar stimulus plan pertaining to individuals (not small businesses) is that you will get $1,200 if you are single making less than $75k or $2,400 if you are married making less than $150k. The amount phases out up to $99k if single or $198k if married. And then you get an additional $500 per child claimed as a dependent under the age of 17. Here’s a Forbes article with more details: Your Guide to the Federal Stimulus Package
Anyway, onto a more important question: What are we going to do with our stimulus money? Now, in case you didn’t know, the government wants us to spend the money because the purpose of these checks is to stimulate this economy that is headed towards some dark times. But if the government told you to social distance, you would, right? OK, bad example because you should! Well, the point is you don’t have to do everything the government tells you and in this case, you probably shouldn’t. The way I see things, there are three options we should consider. And maybe, jokingly, a fourth option. So here they are…
Option 1: Save it!
Obviously, these are wild times we are experiencing in the world today. There is a lot of uncertainty out there especially when it comes to job security. In the three weeks between March 15th to April 4th, there were over 16 million unemployment claims filed! To put that in perspective, it took 18 months to reach 15 million claims during the Great Recession between 2007-2009 (source). It would be wise to have cash on hand should an emergency, whether it be unemployment or something else, become something we have to deal with. Flashback for starters, Lesson 1 from FPU was $1,000 as a starter emergency fund but ideally, we would want six months all the way up to two years. This stimulus obviously will not cover that but it’s a great adder to what we already have.
Option 2: Invest it!
In times like this, CASH IS KING because opportunities will present themselves and those who can act on them are the ones who will prosper! “Buy low, sell high,” they say, right? Since COVID-19 infected our world, the stock market has dropped ~20%. We haven’t panicked & we haven’t sold. Instead, try to look at this from the point of view that the economy is on sale for 20%. Wouldn’t it be nice to get some index funds at a discount? This is a great idea so long as we’re planning on leaving it in there for the long run. Spoiler alert: We are! If you look at the DOW Jones (like the one below) or S&P500 graphs from inception til now, you’ll see the trend is up & to the right so since our plan is to be invested for the long-term and not need the money for the immediate future, it’s best to keep investing without trying to time the market. Look at each drop as a larger & larger discount because eventually as it always has, it will recover to new highs.
Option 3: Pay off debt!
The rehab on the new house, while amazing & well-worth it, has definitely ballooned our debt significantly. It’s something we’ve both had mixed emotions on. But also something we both are on the same page with. And that’s what matters. The story of the rehab is going to have to be a post or two on it’s own. But anytime you pay down debt, that’s a guaranteed return of whatever the interest rate is on that debt. Think of it this way: If you have a debt of $1,000 with 10% interest, your interest on that debt would be $100. If you pay off that debt then you are saving yourself the $100 interest so look at it as a 10% gain. That’s a simple example but I hope it makes the point. So we could use the stimulus money to pay down some rehab debt but I think our interest rates are really only going to be ~5-7%. This likely won’t be the option we choose because option 1 of the emergency fund is probably more important in today’s situation or option 2 will more likely have a much larger gain over the long run. Additionally, we’ll likely need to put together a new debt pay-down plan that will spread that process a few years. The backbone of the plan is in my head but I think we might as well wait til it is all said & done to finalize the strategy.
Option 4: What happens in Vegas, stays in Vegas!
This is probably the only option Uncle Sam would approve of. In this option, we’d be splitting our funds and enjoying one of our last bachelor/bachelorette parties (ugh…we’re getting old). But think about how far $1,200 could go for a weekend in Sin City haha. However, COVID might put both these trips on-hold indefinitely. The last weekend of May & first weekend of June are much closer than they seem and even if shelter-in place restrictions were lifted, how comfortable would we all be traveling and/or being in large groups?
Summary
Whether it’s in case of emergency or for investment opportunities that rarely come in our lifetimes (think stock market in 2009 or real estate in 2011-2012), having the cash available allows us to absorb the financial blow of emergencies or take advantage of a good opportunity. It’s likely that options 1 or 2 or some combination of both will be the path we take with our stimulus. Option 3 is not bad but as I mentioned above, it’s not the best choice. And option 4 might not be an option at all. Once we officially receive it, we can make the final decision.
For everyone else…
During a crisis is the worst time to try to put together a crisis management plan. Ideally, you have thought about this and are referring to your plans to know what to do in times like these. Health & well-being and family safety are obviously the most important things but it doesn’t mean you should disregard your finances. Hopefully, if a financial emergency comes into play, you are prepared to handle it. If not, maybe the stimulus, if you qualify for one, will be helpful to you & your family. I hope the options I laid out above might be relevant to help you out as well. If you need any help or advice, feel free to reach out! Wishing you all some safe sheltering in and much thanks to the front-line & essential workers who are putting themselves at risk to help those in need!