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Smart ways to use the second stimulus check, depending on your financial situation

"When in doubt, hoard cash," says one CFP.

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Last week, nine months after the first coronavirus relief package was passed, Congress agreed on a second stimulus bill. 

Now that President Donald Trump has signed the $900 billion relief bill into law, millions of Americans can expect to find $600 in their bank account shortly.

There's a chance that amount could increase: Last week, Trump said he wanted $2,000 stimulus payments for most Americans. The House plans to vote Monday on a measure to boost payments to $2,000, and in a statement Sunday, Trump said the Senate would also "start the process for a vote that increases checks to $2,000."

If stimulus checks remain at $600, that would be a frustratingly small amount of money during such a time of crisis. In most parts of the country, $600 would barely help cover one month's rent, and in more expensive cities, it may only cover what dwellers owe their utility companies.

The best way to use your stimulus check all depends on your situation. If you can be strategic with the money, it can have an outsize impact on your finances.

If you don't have a rainy-day fund

One good option for many: With so much uncertainty in today's job market, and especially if you don't yet have a robust emergency fund, it's smart to save that $600 in a safe place for a rainy day. 

"People should use the money to pay down debt only if their jobs and income are pretty secure. Otherwise, saving it is the much better choice," says Liz Weston, a certified financial planner and author of "The 10 Commandments of Money."

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"We don't know how long the pandemic will continue or what will happen next to the economy," she says. "When in doubt, hoard cash."

A solid backup fund can be the difference between riding out a sudden job loss and getting evicted. It can prevent a driver from being forced into a high-interest loan to pay for emergency car repairs. If you're struggling with financial instability, whether because you're unemployed or working but unable to save, try to set aside that $600 for a future crisis. 

If you are paying off debt 

Those who are lucky enough to feel secure in their employment, and not fragile in their finances, should consider using this found stimulus money to pay off expensive debt, like credit card debt. 

About 42% of American credit card account holders carry a balance from month to month. If you put that $600 towards a credit card balance with a penalty interest rate of 29.99%, you'd save yourself $781 in interest (assuming you would otherwise just make the minimum payment).

Carrying a balance also means you lose the "grace period" on your credit card, the free loan that card issuers give consumers to pay back their purchases. Consumers who carry a balance lose the grace period, meaning every new transaction incurs interest charges immediately.  

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If $600 happens to be enough to pay off one of your card balances, you could do that. You'll then have a "clean card," which means you'll earn back your grace period in a month or two, and you'll go back to interest-free card purchases. 

You also might think about taking the stimulus money and applying it to a student loan balance or a car loan balance. If you put the $600 towards a car loan balance at 4.99% interest, for example, you could save eight months worth of interest on that amount, or about $20.  

If you're in a position to invest

Assuming you're financially secure, you might get a lot from the stimulus money by investing it. For example, if someone invested the $1,200 stimulus payment in an index fund back in April, today it would be worth more than $1,600.

With investing, though, it's always important to do your due diligence and understand your options. And remember to keep your focus on the long term.

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If you're looking to save for retirement 

If money has been tight in 2020 and you haven't been able to contribute fully to a retirement account, the stimulus payment could be an opportunity to catch up. And if you haven't opened a retirement account yet, consider using this $600 to start one. 

If you put the money into a tax-advantaged retirement account like an IRA or a 401(k), the money can grow tax-free. As an added bonus, money saved in a Roth IRA or 401(k) can be withdrawn without penalty, so Roth accounts can serve a dual purpose as retirement accounts and emergency savings accounts. 

Be sure to invest any funds meant to be available for emergencies very conservatively, though. Otherwise, if you end up needing the money during a market downturn, you've compounded the problem.

If there is a purchase you have been waiting to make

There are other tangible ways to spend your stimulus check to create more immediate economic activity in your community and cross something important off your list. 

Is there an expensive car repair you've been putting off, like a windshield replacement? That $600 can certainly help. Or perhaps there's a dental or other health procedure you have been delaying. You might get that done now too. 

If you are in a position to give 

The holiday season looks a bit different this year. An October survey from Accenture found that Americans are anticipating spending $540 on holiday shopping this year, down $100 from 2019. 

But if the pandemic has not affected your employment situation and you're in a position to give, you could use the $600 to make a charitable donation to some organizations you believe in (which could also act as a tax deduction come April 15), and/or to give meaningful or helpful gifts to friends, family, and colleagues.

Bob Sullivan is an author and consumer reporter. His columns can be found at BobSullivan.net, or you can follow him on Facebook or Twitter @RedTapeChron

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