The American Rescue Plan, signed into law by President Joe Biden last week, includes a third round of stimulus payments worth up to $1,400 for individuals and up to $2,800 for married couples, plus an additional $1,400 per eligible dependent, with no cap on the number of dependents claimed.
The first wave of payments has already hit some Americans' bank accounts, with many more direct deposits to carry the official payment date of March 17.
What you should do with your windfall depends largely on your personal financial situation, says Suze Orman, bestselling author of "The Money Class" and host of the "Women & Money" podcast. "You hear financial experts say, 'Pay this first, then that,'" she says. "How can you tell someone to pay something if you don't know their financial situation?"
Nevertheless, depending on your finances, Orman has a few suggestions for how, and how not, to put your stimulus to work toward your long-term financial health.
One idea that may be top of mind but should be on the bottom of your priority list, says Orman: Using your stimulus money to invest in the stock market. It isn't smart to spend your stimulus dollars on stocks until you have other important financial safeguards in place, she says, like a well-stocked emergency fund.
Here's how she suggests you prioritize.
If you're thinking of plunking a portion of your stimulus money into the stock market, you're not alone, especially if you're young. In a recent survey from Deutsche Bank, half of respondents aged 25 to 34 said they planned to spend 50% of their stimulus payments on stocks.
"If you have income coming in, now the question becomes, 'Do you have a 12-month emergency fund?'" she says. "If you don't have that, I would not be investing in the stock market at this point on any level."
This is especially true for people who are using a portion of their portfolio to trade in and out of individual stocks or partial shares (or slices) of those stocks. "If you buy stocks or slices in a taxable account, maybe it turns out you want to sell them in less than a year," she says. "If they've gone up, now you're subject to regular income tax."
Video by Stephen Parkhurst
These stimulus checks aren't gravy for many of the people receiving them, Orman points out. "It could be that you're among the millions in industries, such as the service industry, who don't know if or when they're getting their jobs back," she says.
If you're in that cohort, prioritize the essentials when it comes to bills — paying the must-haves, such as rent, while putting other less-critical bills on the back burner. "You don't take this and pay down bills like credit card debt," she says. "Continue to pay the minimum payment due." Then, stash as much of your stimulus as possible in an online savings account that pays a reasonable interest rate.
"You should imagine that your boat sank, no one is looking for you, and this is your life raft," Orman says. "Every time you take money out, a little air deflates from your life raft. You need to keep it filled as much as you can so you can survive for as long as you can until you're rescued in the form of a new job."
If you've been earning a steady income throughout the pandemic, you may be tempted to treat a third round of stimulus as play money and use the funds, say, to make a splurge purchase or to take a shot on a risky investment. Before even thinking about that, make sure you've got all of your financial bases covered, Orman says.
Do you have a year's worth of expenses saved up in an emergency fund? If not, she says, that's your first priority: "keeping that money in a place that's safe and sound."
Video by Helen Zhao
Many financial professionals recommend stashing 3- to 6-months' worth of living expenses in an emergency fund. But given how long the current pandemic has created financial chaos in people's lives, Orman thinks you should be looking to build a financial cache that could keep you afloat for a year.
"Forget the goddamn Covid," she says. "What if you get sick? What if something happens and you can't work? You've invested in the stock market and it's going down rather than up. Then what are you going to do?"
If you already have an emergency fund, look to shore up your finances in other ways. "Now it's time to pay credit card debt, catch up on loan payments if you're behind, and fully fund your workplace retirement account," she says. "These are holes in your financial foundation. You want to plug those holes up."
Video by Helen Zhao
Rather than investing your stimulus payment using a taxable brokerage account, if you do have money you don't need to use on the basics, Orman recommends buying investments through a Roth IRA. This tax-advantaged retirement account allows you to fund your investments using after-tax dollars, and withdraw the money tax-free in retirement.
Most young people can contribute the maximum of $6,000 to a Roth in 2021, as long as their modified adjusted gross income is less than $125,000 for single filers and under $198,000 for married couples filing jointly, she points out.
"If you want to be smart with your money, open up and fully fund a Roth IRA," Orman says. "It's just that simple."
More from Grow:
- Suze Orman: Don’t pay off debt with a second stimulus check — here’s your ‘first priority’
- Don’t worry about market volatility, says Suze Orman: Here’s why ‘you should look forward’ to it
- Suze Orman: Don’t make these 4 ‘financially foolish’ mistakes in the new year