How to spend your stimulus check

Unprecedented times call for unprecedented measures.

Let’s review the basics of what just happened (and is happening) to bank accounts across America.

What did Congress pass? 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act signed into law on March 27 by President Trump is a massive $2 trillion stimulus package aimed to provide financial relief to individuals, families, and businesses.* Like other stimulus packages, the 2020 coronavirus stimulus package seeks to provide economic help through a range of measures, including Economic Impact Payments (i.e., stimulus checks or direct deposits to taxpayers).

Are you eligible, and how much can you expect to receive?

If you’re an eligible single filer, you’ll receive the maximum stimulus amount ($1,200 plus $500 for each qualifying child under age 17) if your adjusted gross income (AGI)—your gross income minus any authorized deductions—is at or below $75,000. If you file jointly, you’ll receive the maximum amount ($2,400 plus $500 for each qualifying child under age 17) if your AGI is at or below $150,000.**

If you make between $75,000 and $99,000 ($150,000 and $198,000 for joint filers), you’ll receive a decreased stimulus amount.

A bucket approach to spending your stimulus check

You don’t actually need to stimulate the economy with your check. Here’s what I tell my clients: Since the outbreak, no one’s found it easy to make financial decisions. The best advice I have to offer is: Do what you need to do to sleep well at night. After all, health equals wealth too.

When clients ask for advice on spending their share of the economic stimulus, I look at the buckets in their financial plan. (If you don’t have a plan or find yourself paralyzed with financial decisions, right now could be a good opportunity to seek the advice you need.)

Cash 

You’ve heard it before. Cash is king for meeting short-term savings goals. For instance, you might need cash to pay your 2019 tax liability if you haven’t already filed. You might also need extra cash to cover closing costs if you take advantage of refinancing mortgage debt at lower rates. Protect yourself from a spending shock—an unexpected onetime expense—by saving at least $2,000 in cash.

Put your cash in a safe place. Keep it liquid and control fees. Most important, know how to access it when the time comes. For some, this could mean anchoring cash to the safety of an FDIC institution, which insures U.S. depository institutions against bank failure.

For others seeking higher yields, money market mutual funds and other ultra-short-term investments can be an alternative, yet still liquid, option to stash cash. Don’t forget to refresh your username and passwords to feel confident and secure about your online accounts too.

If you’re completing a Roth conversion or a backdoor Roth contribution, another reason to save a bit more cash (beyond your target amount) is to help you pay your income tax bill next year. Read 3 tax tips to consider in the current market for more info on making tax-smart decisions.

In addition to a cash emergency fund, plan to have easy access to 3 to 6 months’ worth of living expenses in case you lose your income. Save more if your situation calls for added liquidity, depending on your expenses and financial responsibilities. Read more about emergency funds.

Debt

If your debt levels are rising during this pandemic, you’re not alone. It may be a good idea to reassess your debt management strategy.

If you’re struggling to keep up with your bills right now, try calling your mortgage, lending, utility, and even credit card companies to see if they’re offering any flexible payment options in response to the economic impact of COVID-19.

Then I encourage you to lay out your budget. This can be tedious work, but reconciling what’s coming in versus what’s going out is critical to understanding your liabilities. Maybe it’s time to consolidate your long-term debts (outstanding credit card debt, personal loans, etc.) and negotiate a lower interest rate and payment schedule. I like to tackle the debt bucket with 1 of 2 broad strategies:

1. Pay off your high-interest loans first. Often credit cards or student loans.
2. Try the snowball effect. No matter the interest rate, pay off your smallest debt first; then pay the next one, and so on. This allows you to gain momentum on eliminating liabilities from your balance sheet.

Invest

There are plenty of opportunities in this bucket. (It’s also my favorite bucket to talk about!)

• Invest in a taxable (nonretirement) account. This could be an opportunity for you to start saving for an investment goal unrelated to retirement—including building liquid savings you can easily access if you lose your income.
• Sock it away in an IRA. As long as you’ve earned income for 2019, you can make an IRA contribution up to the new tax-filing deadline of July 15, 2020. Already maxed out your contributions for 2019? Get a head start on 2020.
• Fund your health savings account (HSA). This could be a great time to contribute to a retirement health care war chest. Check with your HSA provider on your eligibility to contribute.
• Invest for your children’s or grandchildren’s future education expenses by contributing to a 529 savings plan.
• Take advantage of mandatory family time by teaching your child, grandchild, or a minor to invest by opening a Uniform Transfers to Minors Act (UTMA) account. Share your knowledge and involve them in the process—contributing, tracking performance, understanding risk, etc. After you share your investing wisdom, see what they can share with you. (Maybe you can get a free lesson or 2 on using the vast array of apps available on your computer or smartphone.)

Donate

If you’re inclined to donate to charity during this time, here are a few things to keep in mind.

If you plan to take a standard deduction on your 2020 tax return, the CARES Act has a new above-the-line deduction of $300. Every bit counts right now, and while it’s not a windfall, if you’re in the 22% tax bracket, you could save $66 in taxes if you take the full deduction.* Plus, you get the added bonus of directing your cash donation to a charity of your choice.

If you itemize, the IRS has temporarily repealed the AGI limit on cash donations. (After the Tax Cuts and Jobs Act (TCJA) passed in 2017, the AGI limit for cash donations was 60%.**)

One of the most overlooked planning opportunities for those who have cash to spend but aren’t charitably inclined is to gift cash to a friend or family member. More specifically, a younger investor (such as a child or grandchild) who might be struggling with filling their cash and/or debt buckets right now—at the expense of their other buckets, including the invest bucket. With the annual gift tax exclusion of $15,000, you can subsidize their IRA contribution. As long as they’ve earned income, it’s a win-win. They’ll thank you years down the road for the tax-advantaged growth.

Final thoughts

Balance is the key to life. For some, a stimulus check may be newfound money. For others, it may already be spent. If your buckets are covered, do something for yourself, which, in turn, may benefit others.

For example, support small businesses by booking an online culinary class or ordering takeout from your favorite restaurant. Build a garden and donate the harvest to your local food cupboards. Or start the home improvement project you or your spouse or partner have wanted to check off the list. Invest in a new or existing hobby. Travel when the time is right.

We’re in uncharted territory right now—but it won’t last forever.

If you receive a stimulus check and you don’t need it to cover short-term expenses, think long term.

And stay healthy.

*Source: U.S. Department of Treasury

**Source: IRS

Notes:

• All investing is subject to risk, including the possible loss of the money you invest.
• We recommend that you consult a tax or financial advisor about your individual situation.
• Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.

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