By Theresa Fry, Senior Vice President and Manager, IRA’s and Retirement PlanningPrint This Post
With the first round of stimulus checks delivered and another round being discussed in Congress, now is a good time to review ways to make the most of the income you have received. For many, the stimulus checks were a welcome relief – calming anxieties over how to pay bills such as rent, mortgages, and utilities or provide food to put on the table. The stay-at-home orders forced a lot of people into unemployment in March and April. Recent numbers for May, however, showed an unexpected drop in unemployment. The U.S. Bureau of Labor Statistics reported on June 5 that 2.5 million new jobs were added in May, allowing some to return to work.
Spending all your stimulus check may be tempting but shoring up your emergency fund may be more important right now. There are many things that the COVID-19 pandemic has taught us such as the importance of washing our hands and staying home when we are feeling sick. But financially, it has also reinforced the importance of maintaining a healthy emergency fund. Many financial experts advise having at least three to six months of necessary expenses saved in an emergency fund that is in cash or investments that are easy to access for just this reason.
For example, you could be close to paying off your house and want to get rid of the mortgage payment. It would be nice to no longer have a mortgage payment, but during this unprecedented crisis, having the cash on hand in your emergency fund might be a better move. The same goes for making a large payment on your mortgage using the stimulus check. It’s nice to make a dent in your mortgage, but a healthy emergency fund is likely the better choice nowadays.
If your emergency fund is in good shape, many financial experts would encourage you to pay down high-interest debt as the next best course of action to take with your stimulus payments. According to Experian, the average credit card debt totals $6,194 and a recent survey by creditcards.com* showed 23% of adults with credit card debt have increased that debt during the pandemic. That’s approximately 120 million Americans. Many credit card companies will work with you by offering things like lowering minimum payments, waiving late fees, reducing the interest rate charged, or even working with you to develop a payment plan.
If your credit card is not serving as your lifeline right now, with credit card interest rates averaging around 18%, it is better to use your stimulus payment to pay down any balances on your credit card before investing. Start with the card that has the highest interest rate and work your way backward to the one with the lowest.
A financial advisor can help you weigh your options and determine what is in your best interest.
*Creditcards.com poll May 4, 2020