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10 Smart Ways to Use Your IRS Stimulus Check


Under the American Rescue Plan, President Biden has proposed sending a third stimulus check sometime in 2021. Financial planning expert Bryce Sanders offers his tips on wise ways to spend the money (and a few don'ts, as well). 

Mar 1st 2021
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Many Americans will soon be receiving additional stimulus checks from the federal government. Not everyone is in the same economic circumstances. Consider three of your clients: One works in a restaurant. Another owns a barber shop and the third is a corporate executive working from home. They each face different challenges. You will customize advice based on their unique situation. 

Making Smart Use of Your Stimulus Check

Here are several ways to efficiently use the money you received.

1. Use the money to pay essential expenses. This is why the government is making these payments. Rent and mortgage payments top the list. Car payments too. Feeding your family. You need to survive.

2. Reduce high-interest-rate credit card debt. Your situation is better. You can cover your basic expenses. You are carrying revolving charge card debt. It’s likely charging 15 percent annually. Paying down credit card debt reduces your monthly expenses.

3. Pay your estimated tax bill. You are a freelancer. You pay estimated taxes to the federal and state government. You have a payment schedule. These payments need to be made or you face penalties. This is a wise use of the money.

4. Prepay your property taxes. School taxes also fit into this category. When you receive your bill you might notice a 2 percent discount if you pay in full on an earlier date. Two percent is higher than you would earn if you put the money in your bank. This bill will need to get paid sooner or later.

5. Add the money to your emergency fund. The pandemic has taught us there are no guarantees in life. If your income stopped, you would face a shortfall until you found your next job. Add the money to your emergency fund. This fund should cover your basic expenses for three to six months.

6. Make retirement plan contributions. You are in good financial shape. Your 401(k) plan contributions are taken from your paycheck. Your IRA contributions are paid from your own funds. Make those contributions now.

7. Invest the money. You don’t owe money on credit cards. Your emergency fund looks healthy. You’ve made your retirement plan contributions. Send the money to your financial advisor. Ask them to spread it across your different asset classes or use it to bring an underweighted asset class into balance.

8. Job hunting. You feel your previous job isn’t coming back. Your employer closed permanently. Finding another job requires a good resume and an effective strategy. You are investing in yourself.

9. Spend it locally. Recirculate the money when possible. If you shop online, the money goes to a business far away. If you shop at the local grocery, butcher and hardware store, the money is recycled back into your community. You are stimulating the economy.

10. Charitable contributions. You don’t really need the money. Your finances are in fine shape. You know other families are visiting the local food pantry. Find a local charity that will put money directly into the hands of those needing it the most.

How Not to Use Your Stimulus Check

Here’s a timely example: You heard about the runup in GameStop shares a few weeks ago. It was driven by online retail investors. One article I read cited three reasons it happened:

1. Lockdown boredom

2. The ease of trading stocks online through smartphone apps.

3. The timely arrival of federal stimulus payments (or unemployment benefits).

That’s a good example how not to use the money.

Here are some other poorly chosen uses:

1. Entertainment. You spend the money having a few good nights on the town. The money is gone. You have nothing to show for it.

2. Online shopping. You are bored. You buy jewelry on consumer goods online. You didn’t need these items. Reselling them would be difficult if you needed cash.

3. Gambling. You see plenty of ads for online casinos and sports betting. The odds are not in your favor.

4. Vacation. It sounds like it makes sense, but it’s not something you really need. When thew vacation is over, the money is gone.

Different clients have different financial circumstances. You will advise them accordingly. It would be good to remind them when the government hands out money generously, they intend to get it back at some point in the future.

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