6 Money-Smart Ways to Spend Your Stimulus Check Money
Millions of Americans will start receiving checks for up to $1,200 per person this week, part of the $2 trillion stimulus package enacted in March to ease the economic impact of the coronavirus pandemic.
Millions of Americans will start receiving checks for up to $1,200 per person this week, part of the $2 trillion stimulus package enacted in March to ease the economic impact of the coronavirus pandemic. If you signed up for direct deposit of a refund on your 2018 or 2019 tax return and you're eligible for a stimulus check, the money will be electronically deposited in your bank account. The amount you'll receive will depend on your income and the number of children you have. If you didn't file a tax return in 2018 or 2019, you can provide the information needed to send you a check by using the IRS's "Non-Filers: Enter Payment Info Here" tool. (If you want to know how much you will get, use our handy Stimulus Check Calculator.)
Many families will need to use their checks to put food on the table or keep the roof over their heads. But if you're working, consider putting your stimulus check to work. "The beauty of the situation is there are no stores open, so it is much more difficult to waste your stimulus check," says Andrew Marshall, a certified financial planner in Carlsbad, California. "Instead of buying something you really don't need, put it toward a goal you have."
Here are 6 ways you can make your stimulus check work for you or help your community.
Save for Retirement
If you haven't funded a Roth or traditional IRA for 2019, there's still time to make a contribution that can lower your 2019 tax bill. When the IRS extended the tax filing deadline to July 15, it also extended the deadline to contribute to a 2019 Roth or traditional IRA. The maximum contribution for a 2019 IRA is $6,000—$7,000 if you're 50 or older—so you can stash your entire stimulus check there if you don't need it for anything else.
If you already fully funded a 2019 IRA, you have until April 15, 2021, to invest in your 2020 IRA, but why wait? The bear market has presented opportunities to buy mutual funds and exchange-traded funds at a bargain. If you're not inclined to build your own portfolio, consider investing in a target-date fund, which will invest in a mix of stocks and bonds, based on how many years you are away from retirement.
Pay Off High-Interest Debt
Interest rates have dropped on student loans, mortgages and bank savings accounts, but if you're carrying credit card debt, you're probably paying upwards of 15%. You can free up a lot of cash by paying off those cards. "While the market correction continues and we almost certainly head into a recession, paying down debt earns you a rate of return that you can't find elsewhere," says Benjamin C. Simiskey, a CFP in Katy, Texas. If you manage to pay off the entire balance, you're also eliminating a monthly expense, he adds. "That's the best of both worlds."
Give It Away
If your finances are in order and your job is secure, considering using your stimulus check to help those who don't share your good fortune. You can deduct a portion of your donations on your 2020 tax return even if—like most taxpayers—you claim the standard deduction. To encourage more charitable giving, the CARES Act includes a provision that allows taxpayers to claim a new "above-the-line" deduction for up to $300 in cash donations. Contributions to donor-advised funds don't qualify for this tax break. You can't claim it if you itemize—in that case, you'll deduct your contributions on Schedule A of your tax return—but the CARES Act also includes relief for itemizers who want to make major contributions.
The amount itemizers can deduct for cash contributions is generally limited to 60% of their adjusted gross income (any cash donations over that amount can be carried over for up to five years and deducted later). However, the CARES Act lifts the 60% of AGI limit for cash donations made in 2020, although there's still a 100%-of-AGI limit on all charitable contributions. As with the new above-the-line deduction, donations to donor advised funds don't count.
Melissa Brennan, a financial planner in Plano, Texas, is encouraging her clients to give at least a portion of their stimulus check to food banks or other local non-profits that help those in need. "Lots of hourly workers—retail clerks, restaurant staff, nail technicians, hairdressers—saw their incomes go away practically overnight, but their financial obligations didn't go away, and stimulus checks won't bridge the gap very long," Brennan says. Another option: Donate it to your local animal shelter. During recessions, people who can't pay the bills often surrender their pets, and shelters are hard-pressed to care for all of them.
Shore Up Your Emergency Fund
The unemployment rate has soared as the coronavirus pandemic has forced hundreds of thousands of businesses to close. Even if you're working now, you could experience a drop in income if your hours are cut, you're quarantined, or you have to stay home to take care of your children because their schools are closed.
Ideally, you should have at least three to six months' worth of living expenses in a savings account. If you're not there yet, your stimulus check is a good start. Online banks usually offer the highest interest rates on savings accounts, and some come with no minimum-balance requirement or monthly fee.
Invest in a 529 College Savings Plan
Contributions to a 529 college savings plan grow tax-free, and withdrawals aren't taxed if you use them for qualified expenses, such as college tuition and room and board. You can invest all or a portion of your stimulus check—529 plans typically have very low minimums. Plus, your state may give you a tax deduction or credit if you invest in your own state's plan. If your children are young, you have many years for investments in the plan to compound and grow. To research plans, go to www.savingforcollege.com.
Support Local Businesses
Buy a gift card for a local restaurant or other small business that has been forced to close or scale back operations because of the coronavirus pandemic. That will provide the business with much-needed cash during the shutdown, and you can use the gift card to treat yourself to a nice meal or massage when you're allowed to leave the house.