Spending Your Stimulus Check? Pay Yourself First

The $2.2 trillion CARES Act is the largest emergency relief package in American history. It includes a one-time direct payment to an estimated 93% of taxpayers. Even those receiving Social Security benefits are eligible for a check, even if they haven’t filed taxes in the past few years. The money started hitting bank accounts in mid-April, with paper checks close behind.

Individual filers with adjusted gross incomes less than $75,000 a year will receive $1,200, plus an additional $500 per dependent child under age 17. That amount phases out for those making between $75,000 and $99,000. For married couples filing jointly, they would get $2,400 for adjusted gross incomes up to $150,000, with the check amount phasing out between $150,000 and $198,000. (To find out how much money you'll get, use our Stimulus Check Calculator.)

While the hope is that people spend this money and stimulate the economy, there are a few things you can do to benefit your financial situation now and in the future.

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Open a Roth IRA (or add funds to an existing Roth)

Consider using your money to open a Roth IRA to help diversify your tax liability in retirement. Because you won’t have to pay income taxes on your stimulus check, it’s essentially free money to put in a Roth IRA. Other contributions you make to your Roth will be taxed, but your account grows tax-free and you can withdraw it tax-free in retirement.

A Roth IRA can make a big impact on your overall tax situation in the future. Your taxes in retirement are based on your overall income, and your Roth IRA withdrawals don’t count as income. This means your Social Security check and other income in retirement could be taxed at a lower rate. You can save up to $6,000 in your Roth IRA in 2020, and up to $7,000 if you are 50 or older.

If you don’t have a long-term financial plan, now is the time to meet with a financial adviser who can help you set savings goals for retirement and create a plan to reach them.

Eliminate Debt

Household debt is at an all-time high with Americans owing more than $14 trillion. Use this money from the government to tackle your debt. There are two popular methods:

• The avalanche method encourages you to tackle the debt with the highest interest rate first.
• The snowball method encourages you to pay off the debt with the smallest balance first.

With each method, continue making at least the minimum payments on your other debts as you work to pay it all off. The money you’re receiving now can help you chip away at what you owe.

I recommend eliminating debt before you enter retirement. Any debt payments need to be worked into your retirement spending plan, and eliminating those payments now will help your money last longer in retirement.

Boost Your Emergency Fund

Half of people expect to live paycheck to paycheck this year, and more than half don’t have enough saved to cover three months of expenses. If you’re concerned about being laid off in the near future, take the stimulus money you receive and start an emergency fund. Your emergency fund should have enough money to cover three to six months of expenses if you were to lose your job, miss a paycheck or face an unexpected medical bill.

An emergency fund is a key piece of financial security no matter your age — but it’s especially important in retirement when you’re living on a fixed income.

As unemployment reaches record highs, many people will need this money from the government to make ends meet in the coming weeks. However, for those who are financially secure right now, investing in your future is a move you won’t regret.