How Should I Spend My Stimulus Check?

Handwritten budget figures on notepadThe stimulus checks promised in the Coronavirus Aid, Relief and Economic Security (CARES) Act are starting to land in checking accounts and mailboxes around the country. The $1,200 granted to most middle class adults is a welcome relief during these financially trying times.

Many recipients may be wondering: What is the best way to use this money?
To help you determine the most financially responsible course of action to take with your stimulus check, Advantage One Credit Union has compiled a list of advice and tips from financial experts and advisers on how to use this money.

Cover your basic life expenses
First and foremost, make sure you can afford to cover your basic necessities. With millions of Americans out of work and lots of them still waiting for their unemployment insurance to kick in, many people are struggling to put food on their tables. Most financial experts agree that it’s best not to make any long-term plans for stimulus money until you can comfortably cover everyday expenses.

Charlie Bolognino, CFP and owner of Side-by-Side Financial Planning in Plymouth, Minn., says this step may necessitate creating a new budget that fits the times. With unique spending priorities in place, an absent or diminished income and many expenses, like subscriptions and entertainment costs, not being relevant any longer, it can be helpful to reconfigure an existing budget to better suit present needs. As always, basic necessities, such as food and critical bills, should be prioritized.

Build up your emergency fund
If you’ve already got your basic needs covered, start looking at long-term targets for your stimulus money.

“I would immediately place this money in my emergency fund account,” says Jovan Johnson, CEO of Piece of Wealth Planning in Atlanta.

Emergency funds should ideally be robust enough to cover 3-6 months’ worth of living expenses. If you already have an emergency fund, it may have been depleted during the pandemic and need some replenishing. If you don’t yet have an emergency fund, or your fund isn’t large enough to cover several months without a steady income, you may want to use some of the stimulus money to build it up so you have a cushion to fall back on during lean times that are likely to come in the months ahead.

Pay down high-interest debts
According to the Federal Reserve Bank, Americans owed a collective $930 billion in credit card debt during the fourth quarter of 2019. Using some of your stimulus check to pay off high-interest debt would be a great way to get a guaranteed return on the money, says Chris Chen, of Insight Financial Strategists in Newton, Mass.

This advice only applies to credit cards and other private, high-interest loans. The federal government put a 6-month freeze on most student loan debts, so they should not be as high a priority right now.

Boost your savings
If your emergency fund is already full and you’ve made headway on your debt, it can be a good idea to use some of the stimulus money to add to your Advantage One Credit Union savings account. The money in your savings can be used to cover long-term financial goals, such as funding a dream vacation or covering the down payment on a new home.

Consider all your options before choosing how to spend your stimulus money. In all likelihood, this will be a one-time payment received during the pandemic. If you need further assistance, feel free to reach out to us at 734-676-7000 or news@myaocu.com. We’ll be happy to help you maintain financial stability during these uncertain times.

Your Turn:
How are you spending your stimulus check? Tell us about it in the comments.

Learn More:
marketwatch.com
bankrate.com

Step 4 of 12 Toward A Debt-Free Life: Create An Emergency Fund

Young caucasian woman working at modern deskYou may be feeling impatient to start more aggressively paying down debt, but it’s important to first create an emergency fund. If you don’t have money socked away for unexpected expenses, you’ll be tempted to use the money that’s already earmarked for your debt payments to fund this expense.

Experts recommend keeping three months’ worth of living expenses in an emergency fund, but you can start with a modest $1,000. Set up an automatic monthly or weekly transfer from your [credit union] Checking Account to your Savings Account until you have a fully padded emergency fund. This may take several months, but no worries, you can continue following the next few steps towards a debt-free life as your emergency fund grows.

Your Turn:
Why do you think it’s so important to have an emergency fund? Share your thoughts with us in the comments.

Do I Need An Emergency Fund And A Rainy Day Fund?

Close up of the side of a glass jar of money containg bills and coins and labeled "Emergency Fund"Q: Do I need to have a separate rainy day fund and emergency fund?

A: In an effort to simplify their money, people sometimes consolidate accounts. This is OK in many instances, but it’s important to remember that rainy day funds and emergency funds serve different purposes. Additionally, it’s important to have not just one, but both funds available to tap into as needed.

Read on for all your questions on rainy day and emergency funds, answered.

Why have a rainy day fund?
Say your washing machine decides to suddenly quit on you and needs replacing. You’re now looking at an extra expense that can run anywhere from $350-$850 (or more). Where are you going to get that kind of money in a pinch?

According to a Federal Reserve Board report, if you’re like 44% of Americans, you’ll need to sell something you own or borrow money to fund such an unexpected expense. Or, you might choose to charge the purchase of a new washing machine to a credit card, which means you’ll pay extra in interest and the cost of the new machine will be haunting you for months—or even years—to come. Either way, a surprise expense of a few hundred dollars can be enough to send you into a tailspin of debt.

Is there a solution?
Here’s where your rainy day fund comes in. It’s a small savings account created just for these types of small, unfixed expenses that you know will crop up on occasion. You’ll tap into your rainy day fund to pay for minor household and car repairs, to cover the cost of summer camp for your child, or to replace your broken kitchen table. When you have a way to fund these small financial hiccups, they won’t have as much of a chance to disrupt your financial health.

Why have an emergency fund?
In contrast to your rainy day fund, an emergency fund is for much larger expenses. It should have enough padding to keep you afloat even if you experience a major disruption in your life, like a divorce, job loss or illness. Without an emergency fund, any of these, or a similar event, can leave you scrambling to pay your bills and quickly send you into a debt trap that can last years.

How much money should be in each fund?
Your rainy day fund, created for minor expenses, only needs to hold $500-$1,000. That should be enough to tide you over in the event of a small, unfixed expense.

Sometimes, you may be able to anticipate these expenses and save up for them accordingly. For example, if you know your child will need braces next year or that your HVAC system will need replacing in a year or two, you can build up your rainy day fund over the next several months until it has enough to fund these anticipated expenses.

Your emergency fund, however, should be positioned to pull you through major financial crises. That’s why you will need to have a lot more money in the account. Ideally, it should hold 3-6 months’ worth of your living expenses. This value will vary according to circumstance and can be anywhere from $3,000-$10,000 or more. Find your own magic number by tracking all your fixed and discretionary expenses for a month and multiplying that amount by 3 or 6.

Where should I keep these funds?
By definition, the cash in both of these funds needs to be easily accessible. Don’t lock the money up in a Savings Certificate or another long-term savings account that will make it difficult and/or expensive to withdraw when the need arises.

Your Advantage One Savings Account is a perfect home for both your rainy day fund and your emergency fund. You can even set up multiple accounts for each one. Your money is always safe here, and federally insured by the NCUA up to $250,000. Best of all, you’re free to withdraw your funds without penalty whenever you need to do so.

How can I build my funds?
You’re convinced: You need an emergency fund and a rainy day fund. But how are you going to get the money for both? If you’ve never saved up for unexpected expenses before, the prospect of doing so can be daunting.

No worries, though. With a bit of discipline and hard work it can be done! Use these three tips to build your funds:

  • Start a side hustle. Freelance for hire, take online surveys for spare cash or accept a seasonal position. Keep all or most of the extra money you pull in for your funds, making equal contributions to each fund.
  • Trim your budget. Take a long hard look at where your money goes each month and choose your biggest money-gobbler to be pruned. Use the money you save for your funds.
  • Make it automatic. Set up an automatic transfer from your Checking Account to your Savings Accounts so your funds grow on autopilot and are less tempting to use for fun.

It may be some time before your funds are fully padded, but that’s OK. It takes time to save up that kind of money, and hopefully you won’t need to tap into your savings until you’ve successfully built your funds.

Also, you won’t need to stick to your tightened budget or keep your extra job forever; you can drop both as soon as your funds are built, taking them up again only when the money in one of the funds is depleted.

Start setting up your rainy day and emergency funds today! You’ll sleep better at night knowing you’re prepared for any financial eventuality.

Your Turn:
Do you have a rainy day fund and an emergency fund, or do you use the same source to fund any extra expense? Share your take with us in the comments below.

SOURCES:
https://www.thebalance.com/do-you-need-a-rainy-day-fund-and-an-emergency-fund-4178821

https://www.aarp.org/money/credit-loans-debt/info-08-2011/rainyday-fund-emergency-fund.html

https://www.nerdwallet.com/blog/banking/why-you-should-save-a-rainy-day-fund-and-an-emergency-fund/