May 18, 2020

Planning For Your $2,000 Stimulus Payments

Planning For Your $2,000 Stimulus Payments


It seems as if the $1,200 stimulus payments most got through the CARES Act just cleared our bank accounts when proposals have been introduced promising more stimulus payments to come.

But unlike the CARES Act payment – which was a one-time event – the new proposals promise a series of payments on the order of $2,000 per month.

There are two very similar proposals currently floating around Washington, DC. The Monthly Economic Crisis Support Act sponsored by Senators Kamala Harris (D-Calif), Bernie Sanders (I-Vt), and Ed Markety (D-Mass) proposes $2,000 per month for nearly every American.

Then there’s the Emergency Money for the People Act, sponsored by Tim Ryan (D-Ohio) and Ro Khanna (D-Calif). It proposes $2,000 per month for adults, and $500 for dependent children.

Will either proposal become law? There are compelling reasons in either direction. But if it does happen, it may be in your best interest to have at least a loose plan now for what you’ll do with the money.

After all, if it does happen, we’ll be talking about $2,000 per month – potentially for every member of your household – for an unspecified number of months. Under the Monthly Economic Crisis Support Act a family of four could receive $8,000 per month. If the payments continue for six months, that will be $48,000 in total. If it lasts for a year, we’re talking close to $100,000.

That’s the kind of windfall that needs to be planned for, especially since the payments won’t last forever.

With that in mind, let’s consider the possibilities.

Keeping the Big Picture in Focus

Whichever stimulus plan is adopted, the purpose is to subsidize individuals and families who have the greatest need. For that reason, both plans have income limits. For example, the Monthly Economic Crisis Support Act sets those limits at $100,000 for individuals and $200,000 for married couples. The Emergency Money for the People Act has similar income limits.

More important, though either plan involves a series of monthly payments, they’ll only be temporary. For that reason, it’s mission-critical to treat those payments as a windfall. Once it ends, it’ll be over for good. You’ll then need to go back to living on what you are making before the stimulus plan went into effect.

This is a compelling reason why you shouldn’t fold the stimulus payments into your monthly budget. If you do, you’ll be creating a lifestyle you won’t be able to sustain later.

A much better strategy is to treat the payments as found money and employ it to make permanent, positive changes in your finances.

To make that happen, you’ll need to have a plan in place upfront. It’s amazing how financial windfalls can cause human beings to lose sight of reality. You’ll need to have a big helping of discipline to keep that from happening and to use the money for your long-term good.

Now if you’re unemployed or you’ve lost your business as a result of the coronavirus shutdown, your first priority will obviously be to cover your living expenses. But if you’re still employed, like the majority of people who will receive the stimulus payments, you’ll need to use the money strategically.

What to do with Your $2,000 Stimulus Payments

Whether the stimulus payments total $48,000, $100,000, or something more or less, you’ll need to think strategically. Ask yourself the question, how can I best use these funds to create a better future?

I have some suggestions.

Payoff Debt

If you’ve been struggling with debt, paying off as much of it as you can with the stimulus money can produce permanent, positive changes in your life. $48,000 or more can go a long way toward making that happen. It’s a one-time opportunity, and you should take advantage of it if you have any substantial debts.

One major area of concern for millions of people are student loans. With the average student loan debt currently standing at $32,731, it may be possible to pay off the entire student loan balances with the stimulus money. If your monthly payment on that debt is somewhere between $300 and $400, paying it off will eliminate it from your budget forever.

But maybe an even more important debt choice is credit cards. Student loans may be troublesome in their size and duration. But credit cards carry the highest interest rates of all, often well above 20%.

If you’re currently carrying, say, $20,000 in credit cards at an average interest rate of 24.9%, you’re paying nearly $5,000 per year in interest alone. The stimulus payments are an opportunity to put the revolving credit trap to bed permanently.

Think of the stimulus payments as a one-time chance to eliminate hundreds of dollars per month in debt payments from your budget.

Fill Your Emergency Fund

What’s that you say? You don’t have an emergency fund?

If you don’t, count yourself among the majority. A recent survey by GoBankingRates revealed the dismal statistic that 69% of Americans have less than $1,000 in savings. Undoubtedly, many of the rest have only slightly more.

If that describes you, the monthly stimulus payments are an opportunity to turn the situation around. At least some of the stimulus money should go to build up your emergency fund, especially if you have less than the often recommended three- to six-month’s living expenses in your account.

“An emergency fund should be a critical part of every person’s finances,” suggests Forbes contributor, Sebastian Obando. “A rainy day fund, as some call it, provides much-needed security when unexpected expenses occur. It also helps you avoid going into debt to cover those costs.”

Not only will an emergency fund keep small, unexpected expenses from turning into big problems, but it can also go a long way toward reducing stress in your life.

Anxiety and insomnia are common outcomes from financial stress. While everyone experiences financial challenges of some type, an emergency fund can at least eliminate the most pressing episodes. For example, few stresses have the impact of not being able to meet an immediate expense. A generous emergency fund will largely remove that problem.

The stimulus money will give you a one-time chance to lower the stress level in your life. That will start with a well-stocked emergency fund.

Start or Increase Your Retirement Fund

There are two ways to do this, and you should choose at least one.

If you’re covered by an employer-sponsored retirement plan, you can increase your contributions because of the stimulus payments.

For example, if you earn $60,000 per year, and you’ve been contributing 10% of your pay,  that’s $6,000 per year. But that’s well below the $19,500 maximum contribution you can make (or $26,500 if you’re 50 or older).

While you’re receiving the monthly stimulus payments, you can increase your contributions to your company plan. You can even contribute your entire paycheck. With an annual income of $60,000, your monthly income is $5,000. While you normally contribute $500 toward your plan – which is 10% – you can contribute 90%, or $4,500, if you are receiving a $4,000 monthly stimulus payment.

The basic idea is that you can contribute a much higher percentage of your paycheck to the retirement plan, and live off the stimulus payments for as long as they last.

Do that for just three months, and you’ll max-out your contribution for the year at $19,500. Rinse and repeat if the stimulus payments continue into 2021.

What if you don’t have an employer-sponsored retirement plan? Easy, open a traditional or Roth IRA. Either will allow you to contribute up to $6,000, or $7,000 if you’re 50 or older.

You can also multiply that effort by making a contribution for your spouse as well. That will double your contribution to $12,000. And while you’re at it, save some of the stimulus money to make additional contributions in 2021. If both you and your spouse make maximum annual contributions for 2020 and 2021, you’ll have $24,000 in your combined IRAs by January.

Any of these strategies are an excellent way to start or jumpstart your retirement savings.

Open a Taxable Investment Account

If you’ve paid off your debt, filled your emergency fund, and fully funded your retirement plan, consider investing extra funds in a taxable investment account. That will provide you with growth-related investments outside your retirement plan. And that can help you better prepare for intermediate-term needs.

The easiest way is to open a brokerage account with an investment firm, like Fidelity or Charles Schwab. Both offer commission-free trading of stocks, options, and exchange traded funds. But they also offer other investments, like mutual funds, real estate investment trusts, bonds, and even brokered CDs.

If you’re not comfortable investing on your own, you can set up an account with a robo-advisor. Two primary examples are Betterment and Wealthfront, but you can investigate the many other robo-advisor options that are now available.

Robo-advisors provide comprehensive, low-cost, professional investment management. Advisory fees average around 0.25% of your portfolio each year. Your portfolio consists of a mix of stocks, bonds, and other asset classes, based on your investment time horizon, financial goals, and risk tolerance. Once you set up an account, all you need to do is fund it – the robo-advisor will handle all the investment details for you.

“In the main scheme, robo-advisors are merging customers’ information such as their financial goals, risk tolerances, timeframes, with the right asset allocation that qualifies customer’s needs,” notes Forbes contributor, Ilker Koksal. “While making this merge, they use many algorithms including machine learning models to create the best fit for the customer. In the process of timeframe, they take lots of actions as well such as rebalancing the portfolio or performing tax-loss harvesting. This automatically increases efficiency while taking decisions at the right time for the portfolio.”

Invest Some of the Stimulus Money in Yourself

If you’ve been struggling in your job, career or business, the monthly stimulus plan will be an opportunity to improve your skills. This can either increase your job performance, or even give you valuable training toward a new career or business. Either has the potential to increase your earnings throughout your lifetime.

There are different ways to make this happen. One is to take college courses – many of which can be taken online – or obtain job-related certifications that will either lead to a promotion in your current job, or prepare you for your next venture.

Alternatively, you may want to consider using the stimulus money to help you build a side business. It’s another way to increase your income on a permanent basis. But if it proves to be particularly successful, you may even be able to convert it to a full-time business in the future.

Think about any skills or passions you have, then begin investigating ways to convert them into income-generating sources. It’s often a matter of identifying the right customer- or client-niche for your skills, developing a loose marketing plan, then launching your business.

Starting a side business can often be done on a shoestring, so it won’t eat up too much of your stimulus money. But if it requires a little bit more, the stimulus means you’ll have the funds to make it happen.

Final Thoughts

It may seem premature to begin making plans for the receipt of money that hasn’t yet left the drawing board in Washington, DC. But as we saw with the first round of stimulus payments from the CARES Act, Congress and the White House can move in a matter of weeks if the stakes are high enough.

Depending on how quickly unemployment rises, and the economy sinks, the $2,000 per month stimulus payment may become a reality sooner than anyone expects.

For that reason, you’ll need to have plans in place for what you want to do with the money. And if you don’t allocate it toward making long-term improvements in your finances, there’s a real risk it will simply slip through your fingers.

You have an opportunity now to avoid that outcome, but only if you come up with some solid plans.



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