Make the Most of Your Coronavirus Stimulus Check

As you may have heard, the federal government will send most Americans Opens in new window a one-time payment as part of a $2.2 trillion relief package to help address financial challenges caused by the COVID-19 pandemic. Individuals can expect up to $1,200, while married couples could see $2,400 — plus $500 for each dependent child. Those amounts phase out at certain income levels, based on your 2019 tax return if you’ve already filed (or your 2018 return if you haven’t).

Understandably, covering essential day-to-day expenses will be many Americans’ top priority especially those who’ve suddenly found themselves unemployed. However, if you’re in a reasonably strong position to weather the storm, the payments can help get your finances in better shape. Here are some ways to make the most of the money:

Pay down debt

High-interest credit card debt is a particular burden for many Americans. Reducing — or, better, eliminating — this debt offers several benefits: Paying down a balance is like “earning” the interest you’d have owed the card issuer. You'll have more discretionary income to enjoy. And your credit score will probably improve. One strategy: Focus first on the account with the highest interest rate. Once that balance is paid off, shift extra income toward the card with the next-highest rate, and so on. (Just make sure to pay the minimum due on all your cards.)

Paying more toward student debt or your mortgage may be worthwhile too. Even so, the temporary freeze on federal student loan interest and potential tax benefits could put both on the back burner.

Set up an emergency fund

Far too few Americans have enough saved to cover a $400 emergency, let alone a national economic shutdown. But building a rainy-day fund to cover unexpected expenses is essential to your long-term financial security. It means you're less likely to run up more credit card debt or tap your retirement fund in a pinch, which can have long-term consequences.

Aim to build a fund that will cover three to six months' living expenses. You'll need less money if you're single, have no dependents and are secure in your job; more if you support a family or work in the gig economy.

Boost your insurance protection

Consider this your longer-term emergency fund:

• If you rent, make sure your renter's policy covers you in case someone gets hurt in your home — and can replace all your possessions in case of theft, fire or water damage.
• Review your car insurance liability coverage. Based on your income and assets, you might need more than you think.
• Revisit optional disability coverage through your employer if you opted out.
• Buy life insurance — or review your coverage — along with major life events like engagement, marriage, new house, or a new baby.

Add to — or start — your retirement fund

Thanks to compounding (the earnings on your earnings), even a small investment through an individual retirement account (IRA) can create big results in the long run. With a traditional IRA, some or all of your contributions may be tax deductible. With a Roth IRA, your withdrawals are tax free if you’re 59½ or older and have held the account at least five years. Either way, your money can grow tax deferred. IRAs can offer a wide range of investments:

• Mutual funds. These professionally managed bundles of stocks or bonds offer automatic diversification. They “spread” your risk so that losses from any one company’s poor performance won’t sink your whole investment.
• Exchange-traded funds (ETFs). Similar to mutual funds, ETFs can hold hundreds, often thousands of stocks or bonds at once. The key difference: You can buy and sell shares throughout the day on exchanges.
• Stocks. You can buy shares of individual companies, and many pay cash “dividends.” (Just don’t put all your nest eggs in one basket.)
• Bonds. Bonds are loans you make to companies or governments in return for a set rate of interest. They’re generally more stable than stocks and can provide steady income.

Open — or add to — an investment account

A taxable investment account can help you build wealth or save for specific goals. Unlike a retirement account, you can sell at any time (you’ll still owe tax on earnings). And you can put money in almost any kind of investment.

Build a college fund

If you (or someone you know) has college-bound kids (or grandkids), you can put your payment to work with a state-based 529 savings plan. The money grows tax free, and withdrawals are tax free as long as you use the proceeds for college-related costs including tuition, room and board, required books and supplies — or even to help pay down college debt. Depending on which plan you choose and where you live, you might even snag a state tax break on contributions.

Put it toward short-term goals

You’ve paid down high-interest debt and are on track to meet your emergency and long-term goals? Great! Now think about how your payment can help you prepare for a short-term goal, like buying a car or remodeling a kitchen. Figure out how much money you’ll need, and set up a separate account just for that purpose. That will help you avoid the temptation to tap those funds for things you don’t need.

Footnotes

This is being provided for informational and educational purposes and does not take into account your personal investment objectives or financial situation. Consult your financial and tax professional regarding your particular circumstances.

© 2020 The Prudential Insurance Company of America and its affiliates Newark, NJ

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