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4 Smart Uses for Your Stimulus Payment

The American Rescue Plan Act that passed Congress and was signed by President Biden on March 11 included direct payments of up to $1,400 to millions of Americans whose annual income falls beneath the thresholds of $75,000 for singles or $150,000 for married couples filing jointly. The payments began arriving by direct deposit in some people’s bank accounts the week after the legislation was signed.


If you have lost your job or suffered a loss of income due to the pandemic, the direct payment will likely be a big financial boost that could help you pay your monthly expenses. On the other hand, if you haven’t lost your job or seen your income drop, the direct payment might seem like an early Christmas present.


In this situation, you might be tempted to use your direct payment to “splurge” on something you might not buy otherwise. For example, you could set the money aside to help pay for a summer vacation or use it to buy the latest new laptop or smartphone, giant TV or home furnishings.


While these are all acceptable uses for a financial windfall like a government stimulus payment, you might want to give some thought to ways you could possibly put the funds toward better use. Here 4 other possible uses for your stimulus payment:

1. Pay down debt. The average U.S. family owes a little over $7,000 in credit card debt, according to the 2020 American Household Credit Card Debt Study recently published by Nerdwallet. In addition, the average family carries nearly $28,000 in auto loan debt and more than $56,000 in student loan debt.

If you are carrying consumer debt in one of these forms, consider using your stimulus payment to pay down this debt. Start with credit card debt, since this probably carries the highest interest rate. If you’re carrying the average credit card debt of $7,000, for example, you could almost cut this in half if you put your and your spouse’s combined stimulus payment ($2,800) toward paying it down.


2. Contribute to your retirement account. You have until your tax filing deadline to make a contribution to your 2020 IRA. With the recent extension of the 2020 tax filing deadline until May 17, this gives you even more time to make a tax-deductible contribution and potentially lower your 2020 tax bill.

For tax years 2020 and 2021, you and your spouse can each contribute up to $6,000 to a traditional or Roth IRA, or $12,000 combined. This rises to $7,000, or $14,000 combined, if you’re 50 years of age or over. If you own a business, the contribution limit for a SEP-IRA is much higher: $57,000 for 2020 and $58,000 for 2021. If you haven’t reached these limits yet, consider contributing at least a portion of your stimulus payment to your IRA.

3. Start or build an emergency savings fund. Having an emergency or “rainy day” fund with several months’ worth of living expenses can provide a financial cushion in case you experience a job loss, drop in income or other financial emergency. By tapping into this fund, you can avoid having to use a credit card to pay for unexpected expenses like a major car repair or new HVAC.

If you don’t have an emergency fund, your stimulus payment could be a great way to start one. And if you do have an emergency fund, you could give it a big boost by transferring your stimulus payment into it. 

4. Start a new car savings fund. Many people just automatically factor a car payment into their monthly finances. But with the average cost of a new car now topping $40,000 and the average monthly payment topping $580, that’s a pretty hefty monthly obligation.

Instead, why not use your stimulus payment to start a new car savings fund? It probably won’t be enough to buy a car outright, but it can serve as the initial deposit for a savings account devoted to buying your next car in cash. For example, if you start the fund with $2,800 from your and your spouse’s direct payments and contribute $500 a month to the fund — which is less than the average new car payment — you’ll have saved enough money to pay cash for a $30,000 vehicle in a little over 54 months.

By now you might be thinking: But what if I want to splurge just a little bit? In this case, consider splitting your stimulus payment between one of these uses and your favorite splurge. For example, maybe you could put half toward paying down credit card debt or maxing out your IRA and the other half toward something that’s a little more fun!

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