Today, many Americans woke up to money in their bank accounts courtesy of the US government’s effort to deal with the current economic and health disasters. A few of my clients asked me what to do with the money, a few friends texted me to ask me if they should pay off credit cards, save it or invest it…. And then I decided to post this in one of my Facebook mom groups and got all kinds of answers. With all the disclaimers that go with general financial advice- these are my opinions- but I hope that it can help you think through what to do with this money or any other money that falls into your hands in the future. Here is how I would organize my thoughts to come up with a decision.

This roadmap is purely selfish. You are keeping the money and doing something for yourself. I understand that you might want to gift it/donate it to someone who needs it more, you might want to support a local business, you might do something I can’t even imagine. That is all your choice. That is fine and no one can tell you it is wrong. We cannot quantify humanity and goodwill. My suggestions below come from a purely financial perspective.

The first order of business: is your credit score above 700 and if not, can you spend some of this money to get it there? If the answer is yes, I strongly believe that it might be the right thing to do as you will buy yourself options for the future. If your score is below 700-730 and you have outstanding credit card debt that is dragging your score down, pay off some of this debt and bring it above 690-700, which is the score where you can get 0% APRs.  Use Credit Karma to model your score and see the optimal payoff to get there. Get it up. Get yourself to a place where you use the system to benefit yourself instead of paying interest and running in circles unable to pay off debt.

If your score is above 720-730, ask yourself: do you need to get your score to the 760-780 level? For example, do you need to refinance a mortgage or buy a new car? It might be worth to spend more money to get it to the top tier as the interest rates are going down and if you can take your mortgage from 4.25% to 3.3% by paying off $2-3k of credit card debt, you just saved yourself so much more.  

If your score is already 760-780 and you have some credit card debt, move it to a 0% card for 1-2 years (like Citi Simplicity for 21 months) and do not pay it off unless there is a good reason to do so. Paying off 0% debt is not financially optimal.

Let’s say consumer debt, aka credit card debt, is not your problem, then what do you do? If there is any chance you will be losing some income or your job, keep the money. Hord it. Don’t spend it. Put it into a high yield savings account like Capital One or Marcus, get your 1.55% and do not touch it until you are in the clear. To me, that timeframe is 18-24 months and that is just a guess. The economic implications of what is going on now will last way longer than that and I am personally preparing for 2-3 years of pain.  If you don’t know what three months from now will bring, save this money. Its intended purpose is to eventually pay your water bill, mortgage food, rent and other super exciting bills that you must pay every month.

If you know for a fact you will not lose your income (or for as close as it comes to a fact), then you could spend it. You can spend it on something you wanted to get but never found the money for. One side note here; please do not spend it on something that you can finance with a 0%. And to be frank, I am pretty sure over the next few months, you can finance a trip to the moon with a 0% APR. It does not make any sense to pay cash for a car when the manufacturers are offering 0% financing for 84 months. It does not make any sense to pay $900 for a stove when Home Depot will let you have it at 0% for 12 months. Keep your money, make 1.55% by letting it sit in the savings account and finance that stove for free.

And how about things that you just purely want? Are you allowed to spend the money on that? ….. like that Peloton you always wanted? You have my permission to buy it. It’s no one’s business but yours. Just don’t post it on Facebook if you do not want snarky judgemental remarks.

The option I would recommend you consider if you do not need the cash is to invest it. Be it in a 529 account for your kids, a Roth IRA or a work retirement plan, there is no way you cannot make money if you invest it now and wait for a few years. Even with the upcoming dip (and I am convinced we have not seen the bottom yet), the Wall Street Journal monkeys (if you are familiar with that experiment) will make money. If you want to time the market (something I never recommend), wait a little, wait for another dip and then buy a few funds or even a simple target date fund. Best part-you can forget about it afterwards, come back in 5 years and get your 10-20% return. I am making this super simple, but this is the gist of it. This is the time to invest your cash and unless the world falls apart and the US dissapears from the face of the Earth, you will see good returns.

Even better, go and increase your work retirement pretax contributions for the 401(k)/403(b)/457 by the amount of the stimulus and then use the money you got in your bank account to pay ongoing bills. You will (1) shield this money from taxes and (2) make a whole bunch more in 20 years. Let’s say mommy, daddy and 5-year-old Johnny got a total of $2,900 in stimulus money. Mommy goes and increases her 403(b) for 2020 by that amount. If you do it now, you can still catch the May deductions, so this means $362.50 per month.  Let’s say you are in a 25% combined tax bracket; this means that your impact on the paycheck will only be about $272 and let’s assume you make a 6% return over the next 20 years. Do you know how much money you will have in 20 years? Right under 10k. Your 3k will become 10k… and you still can get that stove by financing it for 12 months and paying the difference between $362 and $272.

I could go on for hours on this topic but I already wrote a book on that so we can be done now. There are just two things I want to leave you with:

  • There is no right and wrong choice when it comes to what to do with this money. I can’t help but optimize the options in my head but that is because that’s what I do every day. You will not get judged by me if you decide to do something suboptimal with it because at the end of the day, even if I think that paying off your 3.5% mortgage is a horrible idea, it makes you sleep better at night and I cannot put a price tag on it (I will still try to dissuade you not to pay that mortgage off if you are ever my client).
  • This is the time to expand your idea about money and what you can do with it. This is money you did not expect.  For some people, money is intimidating but I see it as a tool and the more you learn about it, the more you get to keep. Ask questions, don’t feel intimidated. No one is judging.

This morning, I woke up to $742.50 in my account from the stimulus pot. This was a complete surprise. I had no business getting it. I did not even look at my 2018 AGI because I was convinced we were above the complete phaseout. Turns out, we were a few thousand dollars under it. In a turn of events that just happened to benefit me without any intention, in a very unusual year when my husband took a huge temporary cut in pay to switch jobs, I ended up falling though the intended cracks and with this $742.50 in my pocket. I am now sitting on this money with a moral dilemma. I have no idea what to do with it. I feel that it is wrong to keep it but I am certainly not sending it back to the Treasury. It will probably end up with someone who needs it more than me; I just need to figure out how to align the intent of the bill with its best use.