We’re now more than a year into the COVID-19 pandemic. It’s been quite a year with lockdowns, quarantines and a very slow, deliberate reopening.
Many people have suffered — from illness, isolation or loss of income. Businesses also have suffered economically, and many have closed their doors, whether temporarily or permanently. Vaccines finally seem to be readily available in most locations, so hopefully the pace of reopening will start to increase during the next few weeks and months.
To help ease the suffering and economic loss, the U.S. government has passed several massive stimulus bills aimed at individuals and small businesses. The latest attempt, a third authorized stimulus payment, is a $1,400 payment sent to qualified individuals.
Have you received the latest stimulus payment? What do you plan to do with it?
Before you start to dream of ways to spend it, I suggest you take another look at your personal balance sheet. There are many ways to immediately impact your long-term financial health.
The first place to look is personal debt. If you have credit card debt, applying most, if not all, of your stimulus payment toward credit card debt will pay an immediate, guaranteed return.
An April 7 search of Bankrate.com showed a credit card interest rate of 15.93%. Think about that, an immediate and guaranteed return of 15.93% by paying down your credit card debt. Thank you, Uncle Sam.
Other types of personal loans have interest rates between 4% and 8%, as of April 7, 2021 according to the Dupaco.com website. With savings rates close to zero, these also are very attractive returns.
Hopefully, you’ve already taken care of the debt side of your balance sheet. If so, then you have the ability to save and/or invest some or all of your stimulus payment.
Where or what types of accounts will pay you the biggest bang for your buck? An easy option is a retirement account. If you have a retirement plan through your employer, does your employer match your contributions? If so, are you maximizing the employer match?
In other words, if your employer matches your contributions 50 cents on the dollar up to 6% of your compensation, you can increase your total compensation by 3% if you contribute 6%of your pay into your employer retirement plan. In this example, if you’re not contributing 6% of your pay into your employer retirement plan, you’re leaving money on the table and any increase is an immediate return of 50% of your compensation.
If you do not have a retirement plan available to you through your employer, you are able to defer current income tax or save future income taxes by using an Individual Retirement Account (IRA) or Roth IRA, respectively. Check with your tax accountant on the best option for your tax situation.
Unexpected income can be very tempting to spend on something you might not normally consider for yourself or your family. In this instance, because of the uncertain environment we are facing, it also can be used as a source to provide economic comfort through a strong personal balance sheet.
A stronger personal balance sheet also can bring future economic benefits. Some benefits could include a better mortgage rate, if you haven’t refinanced in the last year or two you should definitely check to see if refinancing makes sense for you, a future investment opportunity or a more secure or even early retirement, all come to mind as possibilities.
Before you spend it on stuff, take some time to think about how using your stimulus payment wisely might position you for a more secure financial future.
This column contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services. This column does not constitute audit, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional adviser before taking any action based on the information herein. RSM US LLP, its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person.