Stimulus check? Smart spending moves for sudden income

Shelly Gigante

By Shelly Gigante
Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
Posted on Dec 28, 2020

The stimulus checks approved by Congress in 2020 to help families experiencing hardship during the COVID-19 pandemic were a much-needed financial shot in the arm for millions of Americans.

But unexpected income of any kind — be it a government check, or an inheritance, lottery winnings, a surprise bonus, or a legal settlement — can either bolster the recipient’s financial security or get frittered away in a matter of months. To ensure that you use those dollars wisely, you need a plan.

“The key to any great financial plan is to balance risk management and wealth management, savings and growth, taxable and tax-advantaged, and so on,” said Brock Jolly, a financial professional with Veritas Financial in Tysons Corner, Virginia. “But with extra cash, where should someone begin? We always suggest to clients that they make decisions now for which their future self will thank them.”

Those decisions will differ depending on your financial position at the time of the gain.

Those with immediate financial needs

For example, those collecting stimulus checks or any other source of found money, who need the income immediately to cover their monthly bills, may need to prioritize:

  • Groceries
  • Utilities
  • Rent or mortgage
  • Insurance premiums (so their policies do not lapse)
  • Loan payments (including auto, student, and minimum credit card payments), to avoid late fees or default, which may ding their credit rating

Any remaining disposable income can be directed to two simultaneous goals: paying down high-interest credit card debt and building an emergency fund worth at least six months of living expenses. Even a few hundred dollars of savings set aside can help insulate your budget against future financial downturns.

Reducing debt not only lessens the amount of interest you must pay monthly, but liberates your disposable income to fund other financial goals, such as saving for your retirement or purchasing new tires for your car.

“During the recent downturn, many have had to accumulate additional debt in order to get through this period,” said Daniel Drabinski, agency managing director of business and estate planning for Bluecrest Financial Alliances in Dallas, Texas. “Have a plan to pay down that debt over time.”

The importance of having an emergency fund, which should be held in a liquid, interest-bearing account such as a savings or money market account, cannot be overstated. A cash cushion can help you sleep well at night, knowing that your household is insulated (at least for a while) from a costly home repair, unexpected medical emergencies, and sudden job loss, said Drabinski. (Related: Emergency fund basics)

As you triage your finances, don’t forget that in times of financial hardship, you may be able to stretch your limited income further by contacting your lenders to negotiate a lower interest rate or by taking advantage of payment leniency programs through your service providers. It’s worth a try.

In the case of the federal stimulus checks, said Drabinski, it is particularly important that you pay attention to the terms. Will you need to set some of that money aside to pay income taxes?

“Understand what you are receiving,” he said. “Is this a loan which may need to be repaid, or a true forgivable loan or grant? A stimulus check should not change your financial plan; it merely helps to address outstanding liabilities or fulfills one of your preset savings buckets.”

If you don’t need your windfall immediately

Those who come into extra money but don’t need the cash to cover immediate living expenses have an even bigger opportunity to strengthen their financial position, beyond ensuring their emergency fund is adequate.One avenue to consider is fortifying retirement accounts.

“If you are fortunate enough to find yourself in a situation where your fixed costs and liabilities are accounted for, you should have a long-term plan in place to address your future retirement income streams,” said Drabinski, who noted that pre-retirees should take this opportunity to shore up their financial security.

Another prudent next place to focus spare cash, according to Jolly, is protection and risk management products that help secure your future and protect the ones you love.

“While perhaps not the most exciting aspect of the financial plan, things like life insurance and disability income insurance, long-term care coverage, wills and trusts, and property and casualty insurance are critical to long-term financial success,” he said. “These are the foundation of a great financial plan, and until an individual or family is financially independent, these are essentials.” (Related: Wills and the basics of estate planning)

You might also consider investing a portion of your stimulus check in a taxable brokerage account, especially if you’ve already fully funded your retirement account.

Or, use it to donate to a favorite charity, which may yield an immediate tax deduction.

Push pause

If you find yourself the lucky recipient of extra income, you have a rare opportunity to pave the path to a brighter financial future. Before you spend a dime, though, take a moment to consider your options.

“As with any liquidity event, it can be tempting to put the money to work right away, either toward an investment or paying off a debt you have been putting off,” said Drabinski. “The best advice is often to take your time. With so much uncertainty in the job market at this time, we often recommend taking the cautious approach before tying up cash.”

Guidance from a financial professional can be helpful.

“It’s times like this when a professional is worth more than ever,” said Drabinski. “I like to use the analogy of a driver traveling from Dallas to New York. They could very well point the car north, get on the nearest highway and begin driving, and eventually they would make it to their destination. But the more efficient method would be to incorporate a road map, or even better, a GPS. The map tells you the most efficient path. It outlines any potential construction zones or accidents. And it can tell you the most likely outcome long before you have to experience the journey.”

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The information provided is not written or intended as specific tax or legal advice. MassMutual and its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.