Ask These 3 Questions Before Using Your Stimulus Check for Debt Payments

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Coronavirus stimulus checks will be landing in many of our bank accounts or mailboxes soon. 

Should you use the money to pay off debt?

Here’s all of our coverage of the coronavirus outbreak, which we will be updating every day.

In normal times, our Penny Hoarder philosophy would be a resounding “Yes!” Using a financial windfall to put a dent in debt can save you from throwing away money on sky-high interest payments.

But what about now?

Although the situation has changed in the midst of this pandemic, a lot of the rules remain — we just need to adjust them for the new normal.

We talked to a couple of financial experts about whether you should use your stimulus check to pay off debt.

3 Questions to Ask Before Using Your Stimulus Check to Pay Off Debt

Whether you’re a single filer receiving $1,200 or a couple getting $2,400 — plus $500 for each child under 17 — figuring out what to do with your stimulus check should be among your financial priorities.

Similar to a tax refund, it can be easy to see this as “free money” that you can use for a little retail therapy or extra takeout orders. That’s understandable.

But as tough as it might be to imagine now, this isolation period will end. Your priority should be surviving it and emerging on the other end without wrecking your financial future. 

But is debt paydown the best use of your check? Here are three questions to help you decide.

1. Have You Lost Your Job or Think You Might?

If you’ve lost your job, your first move should be to switch to a bare-bones budget — and that includes cutting extra debt payments. 

But what if you haven’t lost your job… yet?

If you work in an industry where layoffs were common before the pandemic or your employer is already cutting hours and staff, you should prepare for a potential layoff, advised Ariel Ward, Certified Financial Planner at Abacus Wealth Partners.

“If you’re not struggling yet, put yourself in the shoes that you have lost your job,” she said. “What are the things you’re going to need to cover in terms of monthly expenses that are non-negotiable?”

Even if you have cash right now, hold onto it until this immediate crisis passes if there’s any danger you’ll lose income.

Cash still offers more flexibility if you’re shopping for food at a farmer’s market or a local grocer that doesn’t take credit cards, noted Todd Christensen, an Accredited Financial Counselor with MoneyFit.org, a nonprofit debt relief program.

“I can understand wanting to get rid of an extra debt payment, but if there really is a concern about losing a job, I’m going to say have as much cash on hand as possible,” Christensen said. “Continue to make payments on your debts — at least minimum payments — but my mantra is that times of emergency really are times to save money not spend it.”

Even if you’re spending it on an extra debt payment. 

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2. Do You Have an Emergency Fund?

If your job is fairly secure, is now the time to put that stimulus check toward credit card debt?

Not if you’re living paycheck to paycheck, according to Ward.

“If you don’t have at least a three-month emergency fund — even if you feel your job is safe — that would be the place I’d put your money,” she said.

I can understand wanting to get rid of an extra debt payment, but if there really is a concern about losing a job, I’m going to say have as much cash on hand as possible.

If three months seems like too steep of an ask, Ward recommended starting to build up at least enough money to cover one month of expenses. 

“That would buy you some time if you did happen to lose your job before unemployment benefits might kick in,” she said. “If you only have $500 in your emergency fund, I would set your goal as getting to that one-month point.”

3. Is There a Debt That You Can Pay Off With This Amount?

You have a stable job. You have an emergency fund. Now can you use the stimulus check to pay off debt?

Maybe. But only if knocking out the debt — without dipping into your emergency fund — will significantly improve your financial situation.

“If paying off the credit card debt is going to make a difference in your monthly cash flow, it’s probably a good idea to go ahead and pay it off,” Ward said. “If it’s such a big debt that… you’re still going to have to make payments every month — you should probably hold onto the cash.”

Pro Tip

If you pay off a credit card balance — and can trust yourself not to use it unnecessarily — keep the credit line open, just in case of an emergency expense or a sudden job loss.

If the strategy of knocking out the smallest debt first sounds familiar, then say hello to your old friend, the debt snowball method. It’s where knocking out the smallest debt might not mean paying off the debt with the highest interest rate — that’s the debt avalanche method — but it does provide the psychological advantage of freeing yourself of a credit card bill.

And wiping out that monthly payment from your list will allow you to free up additional cash. 

Just in case.

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.