6 Money-Smart Ways to Spend Your Stimulus Check
If you don't have to use your stimulus check for basic necessities, consider putting the money to work for you. You'll thank yourself later.
Millions of Americans have already received stimulus checks authorized by the $2 trillion CARES Act enacted in March. Many families who have lost income during the coronavirus pandemic will need to use their checks to put food on the table or keep the roof over their heads. But if you're still employed, consider putting your stimulus check to work.
With fewer stores open and most events shut down, it's more difficult to "waste" your stimulus check on vacations, eating out, attending a concert and the like. So, instead of spending your stimulus check on something you really don't need, think about investing, saving, or donating the money you receive from Uncle Sam.
Here are 6 ways you can make your stimulus check work for you or help your community.
Save for Retirement
Socking away money for retirement is always a smart move. You have until April 15, 2021, to invest in a traditional or Roth IRA for 2020, but why wait? The maximum contribution for a 2020 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.
Continued market volatility presents 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, and paying down debt gives you a rate of return you can’t find anywhere else, 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.