Should I Use My Stimulus Check to Pay Down Debt, or Save It?

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At this point, direct payments have already hit a lot of Americans’ bank accounts, and that money couldn’t have come soon enough. With so many people out of work or suffering income loss during the pandemic, a large number of households have been desperate for money.

But what if you’re not struggling financially and don’t need your stimulus to cover your immediate bills? If that’s the case, you can use that money to better your financial situation. If you’re wondering if you should pad your savings or use those funds to pay off debt, here’s how to figure it out.

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What do your savings look like?

As a general rule, you should have enough money in an emergency fund to cover three to six months’ worth of bills. That way, if an unplanned expense, like a home repair, arises, you’ll have money to cover it instead of having to go into debt. Similarly, if you lose your job and can’t find work for a period of time, your emergency savings could get you through that crisis. (Remember, unemployment benefits will generally only replace a portion of your missing paycheck, not your entire income).

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If your emergency fund is in good shape and you don’t need to add to it, then it pays to use your stimulus check to pay off debt. But if your emergency fund isn’t complete, or you don’t have one at all, your first priority should be to establish that safety net.

Now, you may be thinking that since debt costs so much money in interest, why not pay off debt first?

And here’s the reason. Without emergency savings, you’ll run the risk of racking up even more debt when unplanned bills or other unfortunate circumstances arise. So while paying off debt is a smart use for your stimulus money, you should first make sure to give yourself some type of financial cushion.

Also, it’s easy to assume that you can always just take on more debt the next time an unanticipated expense comes up, but what if you don’t get that option? What if you max out your credit cards and don’t qualify for another loan, yet need money? If you have an emergency fund, that won’t be a problem. But without one, you could end up in serious hot water.

What type of debt do you have?

Now, let’s say you’re confident in your emergency fund, so you’ll use your stimulus to knock out debt. Before you start paying off various bills, be sure to order your debt by least to most healthy.

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As a general rule, credit card debt is bad news, as it can hurt your credit score and cost you a lot of money in interest. Debt from personal loans isn’t as bad — though it can damage your credit if you fall behind on your payments. But the interest personal loans charge doesn’t tend to be as high as what credit cards charge.

And then you may have a secured loan, like an auto loan or mortgage. Those are considered healthier types of debt because they eventually help you own an asset. And of the two, mortgage debt is the most healthy, because it can help you own an asset (a home) that gains value over time. On the other hand, vehicles do the opposite — they lose value over time.

If you’re planning to use your stimulus for debt payoff purposes, aim to attack your debt in this order:

  1. Credit cards (start with the card charging the most interest)
  2. Personal loans
  3. Your auto loan
  4. Your mortgage

Keep in mind, too, that if you can manage your monthly car and home payment, you don’t have to rush to pay off those debts. While putting money into them will save you a little bit of interest, both types of loans — especially mortgages — are meant to be paid off over time.

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Put your stimulus to good use

A lot of people need their stimulus funds for basics like food. But if you’ve got your bills covered, it’s a good idea to use your stimulus to boost your emergency fund or pay off debt. Tempted as you may be to blow that money on something fun, especially after the miserable year a lot of us have had, using those funds responsibly will serve you much better in the long run.

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View more information: https://www.fool.com/the-ascent/personal-finance/articles/should-i-use-my-stimulus-check-to-pay-down-debt-or-save-it/

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