The #1 thing NOT to do with your stimulus payments

There may be many choices to make with your economic stimulus payment, but there is one choice that is particularly detrimental to your financial health.

COVID-19 has certainly ravaged many areas of our economy. Even if it has not financially affected you directly, everyone can name a friend or family member who has experienced financial loss in one form or another. Lost jobs or layoffs, decreases in sales, and government-mandated shutdowns of small businesses are just a few of the ways this pandemic has personally affected millions of Americans.

To help counteract these negative effects on our economy, the federal government has provided economic stimulus payments to most middle and low income Americans. To date, there have been three payments, and a fourth payment is already under discussion. No matter how you feel about these payments, they are a reality and have been helpful to those impacted by the economic downturn caused by the virus.

But what should you do with this windfall of cash that the government has provided? For those negatively impacted, this money will go toward rent, house payments, food, transportation, and other basic necessities. However, for many of those not suffering financially, the decision on what to do with the payments is an important one. According to the U.S. Census Bureau’s weekly Household Pulse Survey from week 25 of this year:

58% of households used the stimulus payments to pay off debt.

28% spent the majority of their payments.

19% saved the majority of their payments.

As a Financial Coach, I applaud the fact that 77% of households surveyed say they either decreased debt or increased savings with this money. Those are two uses for extra income that we can all get behind. That does not mean that the roughly 1 in 4 households that spent the stimulus payments were in the wrong. Unfortunately, many of those households may have needed this funding to provide basic necessities due to economic hardship caused by the pandemic. Some families who may not have been seriously impacted may use these funds to buy needed clothing, make small home improvements, or upgrade an older appliance or two. Using the payments to make these purchases can take pressure off of future budgets or avoid having to use your emergency fund to replace that aging refrigerator. Others may have used this income to add to funds already saved and purchased a larger item, a car (hopefully a used car!), new computer, or other useful items. In all of these cases, the stimulus money can be used to improve the household financial picture.

There is one category of spending, however, that would be a mistake. That would be to use the stimulus payment to create debt. Wait a minute. You may be wondering how extra income would create more debt? It could create more debt when that money is used as a down payment for a loan. Whether buying a car, boat, RV, furniture, major home improvements, or any of the hundreds of other things offering “easy financing”, using this extra cash as a down payment on new debt will only worsen a family’s financial position in the long run, and should be avoided if at all possible.

The stimulus payments provided by the federal government have been helpful to many American families impacted financially by COVID-19. For those not as heavily affected, the payments can also be a blessing, IF they are used to improve the financial picture of the household.

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