Six Ways Your Stimulus Check Can Pay Off

Six ideas to make the most of the latest stimulus payments and what it’s worth in the long run.

The “American Rescue Plan” is set to be signed by the President this week. Better known in the headlines as the $1.9 trillion coronavirus-aid bill, there is quite a bit in here including money for vaccination programs, extensions of unemployment insurance, increases to the child tax credit, and of course stimulus checks.

This time around, the stimulus checks are $1,400 per person, children and adults included. That means a family of four who qualifies for the full payment would receive

may i have another meme

$5,600. That is no small number!

We will get into some suggestions on what to do with your stimulus check, (or “stimmy” as some call it) in a moment but let’s recap who is eligible to receive it in the first place. Just like the first two rounds of stimulus there are maximum income levels before your payment gets reduced or eliminated, and this time around the “phase out” ranges are much narrower.

| Tax Filing Status | Phase Out Begins (Reduced Payment) | Complete Phaseout ($0 Payment) | | :--- | :--- | :--- | | Single | $75,000 | $80,000 | | Head of Household | $112,500 | $120,000 | | Married Filing Jointly | $150,000 | $160,000 |

Source: Forbes

As you can see a single person making under $75,000 will receive a full payment but making $80,000 or more eliminates the payment completely. At the end of the day you should still prefer the higher income, but you can go very quickly from a full payment to $0 based on these ranges. A quick note here – if you have seen major reductions in income in either 2020 or 2021, pandemic related or otherwise, talk with your accountant about whether you qualify to recoup the underpaid amounts on your tax return.

Unfortunately, many that receive the stimulus will simply need to catch up on past due items. Maybe it's rent or a car payment, so before addressing any of the ideas below, first make sure you are caught up on any past due obligations. If you have those bases covered and your ready to leverage your stimulus into additional ideas, read on!

1. Shore up your emergency reserves

With the COVID-19 crisis many Americans are re-evaluating how prepared they are for unexpected financial emergencies. Almost 60% of Americans do not have the cash to cover a $1,000 emergency. By putting away $1,400 for a rainy day not only are you above the average, you could mitigate the debt spiral that could come from reaching for credit cards in an emergency.

If you instead had to borrow that $1,400 and could only make the minimum payment it could take you nearly 15 years to pay off and cost you almost $1,800 in interest, more than doubling your cost.

| Starting Balance | Minimum Payment | Interest Rate | Months to payoff | Interest Paid | | :--- | :--- | :--- | | $1,400 | 2% of balance | 16% | 177 | $1,794.19 |


2. Pay down your credit card

Speaking of credit cards I don’t need to tell you that paying down your credit card is a good idea, but how much is it really worth to you?

Let’s say you have a credit card with a $10,000 balance and an interest rate at 16% and you’re able to put $200 per month towards the balance. It will take nearly 7 years to pay off the $10,000 and cost you nearly $6,600 in interest!

What if you put $1,400 towards that balance today and continued paying $200 per month? Not only will you pay it off a year and a half sooner, but your $1,400 one-time payment would have save you $2,321 in interest.

| Starting Balance | Monthly Payment | One-time Payment | Interest Rate | Months to pay off | Total Interest Paid | Interest Saved | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | $10,000 | $200 | $0 | 16% | 83 | $6,588.87 | 😢 | | $10,000 | $200 | $1,400 | 16% | 66 | $4,261.55 | $2,321.32 |

3. Pay for a professional development course to boost your earning power.

In my 17 year career, I have always looked for ways to invest in my job knowledge and credentials. From larger expenses like completing the coursework to prepare for and pass the CERTIFIED FINANCIAL PLANNERTM exam to smaller investments like a recent student loan workshop I attended virtually, these investments in myself have allowed me to continue to progress my career and given me more knowledge to better serve my clients.

While the COVID-19 pandemic has brought many challenges to our work life – one observation is that many of the courses that previously required expensive travel and in person classes are now being offer via webinars at greatly reduced prices. Now may be the time to seek that extra designation, certification or new skill you have put off.

4. Invest in your health

If investing in your professional development offers a way to boost your earning power, investing in your health could work the other side of the scale (pardon the pun) and reduce your healthcare costs. As we also discussed in our article on healthcare savings accounts, retirement healthcare can get expensive. Even before retirement, poor health can push you into more expensive healthcare plans and more uncomfortable doctor visits.

jeff performing barbell squat
Investing in my health squatting 350 solid pounds

This is another item I have taken on personally as I began barbell training in 2018. First it was investing in a couple books and a gym membership, then some barbell coaching to help me get the most out of my training. Eventually it was putting some money down to build a small home gym so I could still get my workouts in without spending time traveling to and from the gym, changing, and waiting on equipment. I feel stronger and healthier than ever and hope to ward off the chronic injuries, broken bones and muscle loss that can come with old age. Investing your stimulus in your personal health may be money well spent.

5. Upgrade something important!

We all have that one appliance that we know is just about to go in catastrophic fashion. The water heater that just doesn’t heat like it used to, the air conditioner that is well past it’s life expectancy or the washing machine that keeps collecting water for some reason. Certain improvements might even qualify you for a tax credit, and we love tax credits!

Smaller improvements work too. There are a few great ideas here, and while you probably won’t see me hanging clothes out on a clothesline, we have replaced many of our existing light bulbs with LED bulbs, made use of programmable thermostats for our air conditioning, and have a completely insulated attic which is incredible in the heat of the Florida summers.

6. Invest it!

I saved this one for last because you already knew I was going to say it.

These stimulus checks are generally an unexpected drop of money and probably outside of what was assumed in your financial plan. That might give you the opportunity to put the money towards something you hadn’t planned on doing, such as one of the ideas above. However, if you have your basics covered and no other immediate needs, consider whether these extra funds could add to your investment strategy.

How exactly to invest it is a great conversation to have with a financial planner who understands your long-term needs and your risk preferences. Let’s say hypothetically that you invest in a portfolio that is balanced to 60% stock and 40% bonds. As we have noted before, Vanguard has estimated an 8.1% average annual return for that kind of investment allocation giving that $1,400 the potential to turn into quite a bit more over time – if you can withstand the short-term volatility.

There are tons of different ways you can put your stimulus check to work for you. If you’re not sure what’s best for you in your situation, schedule some time with us to see if Create Wealth Financial Planning can get your financial plan growing in the right direction.

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