The novel coronavirus has been wreaking havoc on the U.S. economy since March, and although parts of the country are starting to open up, it’s clear Americans still need relief. Many have already received a one-time stimulus payment of $ 1,200, while others are still waiting for this money, namely those who have not submitted their bank account details to the IRS for direct deposit, and must now just sit there until a paper check comes in. in the mail.
If you are sitting on your stimulus money, or are expecting it soon, you can have big plans for that money. The question is: should you use it to pay off an existing debt?
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Options for your stimulus money
There are a lot of smart things you can do with your stimulus money, and paying down the debt is one of them. This is especially true if your debt is of an unhealthy nature.
Mortgage debt, for example, is considered healthy debt. It can help you build up equity that could serve as a source of cash when you need it, and it won’t hurt your credit either, as long as you make your payments on time. Credit card debt, on the other hand, is a unhealthy type of debt to have. Not only can this cost you a lot of money in interest, but too much can lower your credit score as well. A lower score will make it harder to borrow affordable (or not at all) money when you need it.
As such, paying off credit card debt is a smart thing to do with your stimulus money, but only if you can check the following boxes first:
- You have enough money to cover your short-term needs
- You have an emergency fund with at least three months of living expenses
While paying off unhealthy debt is a smart way to spend your stimulus money, you don’t want to end up replacing existing debt with new debt. If you don’t have enough cash on hand to pay for essentials in the weeks to come, keep that stimulus cash on hand to do groceries, pay for medications, and cover any other bills that don’t. can’t wait.
If you’re good at spending the day but running out of emergency savings, put that money in the bank. That way, if an unforeseen expense arises, you won’t have to charge it to a credit card and increase your debt load. Plus, if you end up losing your job during the current crisis, this emergency fund will help you pay your bills. Keep in mind that your unemployment benefits may not be enough to fully replace your regular paycheck.
Should you stimulate the economy?
Many people argue that it makes sense to put stimulus money back into the economy. And while supporting local businesses is a great way to do this when they reopen, if you have unhealthy debt, repayment should come first. You can still commit to going to businesses in your area when you’re in better financial condition, but right now it’s more important to pay off your debt.
Americans could get a second stimulus check
If you’ve already spent your stimulus money, here’s the good news: Americans can line up for an extra payment. There are several different proposals on the table.
The HEROES Act includes, among other provisions, an additional one-time stimulus payment of $ 1,200 per eligible adult and child, up to a maximum of three dependents per household. This means that a married couple filing jointly with three children could receive $ 6,000 under this proposal.
Meanwhile, the People’s Emergency Money Act, introduced before the HEROES Act, provides $ 2,000 in recurring monthly stimulus payment for single filers and $ 4,000 for married couples filing jointly, plus $ 500. $ additional per child for up to three children. per household. These payments would be subject to the same income thresholds as the first round of stimulus checks, so the highest earners might not receive some or all of that money. These payments, however, could be available for up to a full year.
Of course, neither of the bills was approved, and Republicans pushed back on the two Democrat-sponsored proposals. The reality is that neither of the two proposals is likely to be adopted without adjustments. But I hope both sides manage to put politics aside to bring some financial relief to Americans who really need it. And if you end up getting that money, using it to pay off the debt is a good idea.
The less money you owe each month, the less dire your situation will be if you are laid off in the next few months. And if you manage to stop wasting money on interest, you’ll have more to put back into the economy in due course.
Keep in mind, however, that it may be some time before the Americans see a second stimulus check. In the meantime, if you still have money left from your original check, try stretching it. If you need it to pay for the essentials, don’t use it to pay down debt. While using a windfall to eliminate debt is a smart idea, your first priority should always be to cover your immediate needs and use additional money to get rid of unpaid obligations.