How to Spend Your $1,200/$2,400 Stimulus Check

It’s official – the government will be sending free money checks to millions of Americans. $1,200 will go to individuals and heads of households and $2,400 will go to married couples with no kids. Also, if you have kids, expect to get an additional $500 per child.

The coronavirus checks will be direct deposited to your bank account within 3-4 weeks. If the IRS doesn’t have your bank information they will soon create a web portal through which you will be able to provide your banking information in order to expedite the process and receive the money as quickly as possible. Otherwise, expect to get the check via regular mail.

Make sure you have the correct address on file.

Is Help Sufficient?

Many people already said that the government stimulus check won’t be even enough to cover their rent. So obviously, the help is insufficient. Especially it won’t be enough for those living in high-cost of living states and cities. The situation looks even worse when compared to some other countries in which governments will be covering up to 80% of salary for the duration of the lockdown. However, it is what it is and despite all this I think the financial help is definitely better than nothing.

Eligibility

To be eligible for the 2020 stimulus check your income should be within certain limits:

• $75,000 for an individual
• $112,500 for a head of household
• $150,000 for a married couple filing jointly.

To determine your income the government will look at your most recent tax return. If you haven’t filed your 2019 taxes yet the government will look into your 2018 tax return.

For every $100 above the income thresholds, the check will go down by $5.

So, you won’t receive any money if your income exceeds:

• $99,000 as an individual
• $136,500 as a head of household
• $198,000 as a married couple

Do You Need to Pay the Money Back?

A common question many people ask is whether you would need to pay the stimulus check back should your income exceeds the above limits in the future. The check is structured as a tax credit to the 2020 tax return and depending on your 2020 adjusted gross income you will either:

1. Keep the whole amount and will owe nothing back
2. Pay the difference on your 2020 tax return if the check you received was for more than what you should have received
3. Pay the whole check back if your 2020 exceeds the income thresholds.

If end up owing money you wouldn’t have to pay it back until April 15, 2021

Finally, the free money checks are not taxable – you will not have to pay taxes on the money.

Things on Which You Should NOT Spend the Money

Before we talk about how to spend the money, let’s talk about which things you should NOT spend the money on first. Remember, it’s important to be very careful with your money now as tough times aren’t over yet and we have no idea if social distancing will be extended again past the new date of April 30^th.

First, don’t make any payments on your federal student debt. The CARES Act provided a federal student loan payment relief and payments were deferred by 6 months, through the end of September 2020.

Second, the bill provided relief to homeowners. If you have an FHA or a VA loan, you are now eligible for forbearance (up to 180 days with an option to extend for another 180 days). If your mortgage loan is backed by Fannie Mae and Freddie Mac – you can skip payments too. However, check with your mortgage service provider as there is a lot of confusion out there.

Things on Which You SHOULD Spend the Money

Now, let’s talk about some good ways of spending the money check.

1. If there is an absolute necessity – use the money to stock up on food, supplies and other essential and necessary items. The most important thing in this environment is to stretch the money for as long as possible and use it for the well-being of your family.
2. Beef up your emergency fund. Deposit the check into your emergency fund and let it sit there for a few months at least. Your emergency fund must be located in a high yield savings account with an annual yield above 1%, There are plenty of options to choose from, like Goldman Sachs Marcus, American Express Personal Savings, and Capital One. I’ve personally been using Ally for years and they pay me 1.5% in interest. On top of it, I get free money checking and amazing customer service.
3. Pay off your debt. If you are still working and being paid on time, use this check to tackle some high-interest rate debt that has been dragging you down. A good rule of thumb is to pay the debt with the highest interest rate first and that is usually your credit card debt. Also, paying off any debt is a great way to get an immediate guaranteed return, which is about 17% for credit cards.
4. Donate the money. Retails clerks, restaurant workers, hairdressers and myriads of others may not be as fortunate as you are and truly need help. There are so many fundraising campaigns on Facebook and other websites aimed to help these folks. By donating a portion of your stimulus check you can become a part of this movement and show compassion which is so much needed during times like this.
5. If your family is protected and has everything it needs, your emergency fund is filled, debts are paid off, and you even helped those who are in real trouble by donating a portion of your stimulus check – carefully invest the rest. There are so many good investment opportunities now but I don’t recommend individual stock picking. Why? Because we will still have no idea who is going to stay in the business and who will go bankrupt. For that reason, I recommend creating a diversified investment portfolio and investing in individual industries and sectors instead. The best way to do that is by investing in low-cost index ETFs and then gradually investing the money over the next few weeks. Why gradually and not all at once? For the very same reason – the uncertainty. We have no idea what’s going to happen in the next one or two weeks and whether the stock market bottomed or not.

If you decide to invest, consider a Roth IRA. By investing within the Roth IRA you will never have to any taxes on those profits and can even leave it to your heirs tax-free, too.

Conclusion

Don’t do any crazy things with the money unless you know exactly what you are doing. Your family should always come first and since we have no idea for how much longer this situation is going to last you need to play it safe and be smart.