Tips on using your stimulus when your funds are already low

Since the most recent Covid stimulus bill was enacted earlier this month, the U.S. government has already provided around 90 million Americans with all or some of $1,400 payment. This week 20 million more will receive the money via mailed check and prepaid debit cards.

The next big question is, how should you spend it?  

For millions of Americans, the harsh realities of the pandemic mean the money is a precious lifeline.

A record number of Americans found themselves out of work as unemployment figures hit 14.7% in April 2020, forcing many to use savings or go into debt to help pay bills. Southern states followed the trend of double-digit jobless rates. In Alabama, the unemployment rate hit nearly 13%, compared with 14.5% in Louisiana, 12.5% in Georgia and 15.7% in Mississippi.

The unemployment rate back then was the highest since the Great Depression, according to the Bureau of Labor Statistics. Leisure and hospitality, an industry that typically employs large numbers of low-income people, saw unemployment near 40% one month into the pandemic. Southern counties that rely on travel and tourism were also hit hard. Okaloosa County in Florida’s panhandle, home of Destin’s famous beaches, saw unemployment peak at 13.3% in April 2020.

Alabama’s Baldwin County saw unemployment hit 15.4%, while the casino-rich Harrison County in Mississippi peaked at 22.8%. 

Black unemployment edged close to 17% compared with 14.2% for white and 18.9 for Hispanics.

The job losses forced millions to use food banks for the first time while approximately 10 million Americans found themselves owing rent at the start of 2021.

Louisiana, Alabama, Mississippi, Georgia and Texas are among the states that struggled with rent arrears last summer, according to an analysis by CNBC.

So unless the cash is just loose change in your bank account, financial counselors suggest creating a hierarchy of needs. 

“Families should use stimulus funds to first take care of essential needs – medication and vital medical needs, food/water, heat/electricity, housing/shelter, and transportation,” said Kristen Holt, president & CEO of GreenPath Financial Wellness, financial education nonprofit.

Stimulus funds should be used to address (urgent) past-due bills, and cover property or other tax payments. Once essential needs are covered and a solid level of emergency savings is established, funds could be used to pay down high interest debt incurred as a result of lost income due to the pandemic.”

Holt said that for those who are employed or receiving unemployment benefits and have their basic needs covered, the money should be used to establish a 3–6-month emergency fund.

A recent Bloomberg poll of how people plan on spending the money found that 35% of respondents plan on saving the money. A further 30% will use it for food, while 22% and 18% will spend the money on housing and paying down credit card balances, respectively.

Invest carefully

However, the poll also suggested that a significant number of people intend to put the money toward student debt or try to invest it. With the rise of so-called meme stocks, such as GameStop or AMC, some may be tempted to throw the money in toward a day trading app like Robinhood, in the hope they can make a quick buck and grow their $1,400.

But Bruce McClary, the vice president of public relations and external affairs at the National Foundation for Credit Counseling warns against running headfirst into the market.

“You may hear stories about people who achieve fantastic results and become wealthy overnight, based on different movements in the market,” said McClary, who is also a certified financial educator with 30 years of experience. “But those are isolated stories for the most part. What you don’t see as much of are the stories of investors who put all their money on the market and lose it in a matter of minutes or hours. It’s probably better to save on the conservative side and use more traditional savings tools where your money is protected, where your money is insured, and where you’re not likely to lose what you’re putting aside.”

In 2020, Americans paid off a record $83 billion in credit card debt. It was the second time in 35 years that American’s ended the year with less credit debt than they started with. The first time was in 2009.The surge in debt repayment is in part because of the influx of extra money, including the two previous stimulus payments and, in some cases, generous unemployment.

While paying down high interest credit cards isn’t a bad idea, Holt and McClary suggest thinking carefully before putting the money toward student debt, especially given the interest-free forbearance and as the current White Administration mulls the cancellation of $10,000 in federal debt.

“If you have high student debt,” said Holt. “You could consider continuing to pay your student loans so that you can pay the loan off faster as the full payment will be applied to the principal amount of your loan, reduce overall interest, improve your debt totals and improve your credit score.”

McClary added that if you have other basic needs that have to be met you “may not want to put it towards your student loans, you may want to continue benefiting from the payment moratorium and the 0% interest.”

Ultimately, what you do with the money is going to be very specific to your circumstances.  

Use the list below to help prioritize your spending:

  •       Food, water and accommodation
  •       Electricity
  •       Transportation
  •       Medication and other vital medical needs
  •       Urgent past due bills
  •       Property and tax payments
  •       High interest credit cards
  •       Emergency fund (3-6 months)
  •       Savings
  •       401K retirement account

For anyone who wants financial advice, there is help available.

You can contact GreenPath financial Wellness here or call 800-550-1961.

Or try the National Foundation for Credit Counselling on 800-388-2227

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