FREE MONEY! Now What?

My personal passions intersect in this moment. I live and breathe both politics and personal finance; I even studied politics and economics formally. I often remind people that we should all care about politics because we have to care about politics. That’s because politics affects our daily lives from our water to our roads to our tax burdens.

And politics matters no greater than at a time of great uncertainty, job loss, and economic turmoil. As I write this we as global citizens are fighting a global war against Sars-COV-2, a virus that causes the illness COVID-19. The dangerously contagious and lethal disease has turned the entire global economy upside down as a (hopefully) short-term shock to the system.

As this cause is not driven by financial fundamentals, we hope that the economy will recover as soon as the virus has subsided. However, in the meantime millions of Americans–through no fault of their own–will be out of work or out of stable income. This sudden, unprecedented recession likely about to hit our shores in the United States is affecting people across classes, geography, and age. Absolutely some groups will be impacted more than others due to the long-existent traces of systemic inequities in our economy. I do find it so saddening that especially those who did everything right in their careers by starting a successful small business or otherwise will be so harmed financially by this virus. Even the hourly worker is not to blame for their impending struggles as they are merely at a (possibly temporary) station in life attempting to build wealth perhaps for the first time. Of course, we can all better prepare for these unexpected crises by building emergency funds and being more diligent savers, but to pin the blame solely on free will and rugged individualism washes over the vast interdependence of our economy. We are witnessing now more than ever just how much we need each other in order to thrive economically.

In a moment where people are being directed not to even leave their home–let alone engage in commerce, we need a government to step in and stimulate the economy in a way no business or individual ever could. These times of crisis remind me exactly why we have government. Yes, we need overarching agencies of scientists to guide us in how to best fight this virus, but we also need a body that can act when no one else can. When every person and business is fearful, we must have a government that can step in to fiscally support us all when no other option exists. We pool our efforts and also our tax dollars so that we can act in times like these. As an aside, the government’s efforts are currently being funded by debt not tax revenue, but nevertheless only a government can even act in such a way.

Now that my defense of government is over, we can discuss what you are really here for: FREE MONEY! Indeed the government is in the midst of likely passing the largest-ever stimulus package to the tune of $2 trillion — $2,000,000,000,000! There are myriad relief elements within the bill for industries (such as the airlines), small businesses, and individuals. For now we will focus on that third element and specifically the direct cash payments to citizens. The payments are funded by a $250 billion appropriation to individuals with the hope of offsetting some of the economic pain felt by Americans.

What does this mean for you? Well, first you must be a citizen; unfortunately undocumented tax-paying immigrants will be excluded even though they are likely just as impacted by this pandemic. Second, in order to get your “tax rebate” soon, you must have filed 2018 or 2019 federal income taxes; if you did not, you can file later for 2020 and get the payment as a tax credit then.

Now the technical:

TIMING: Direct cash payments will be based on 2019 if you already filed or 2018 if not, and they will be direct deposited to you if you filed electronically. If you filed by paper, you will be likely mailed a check that will take longer to deliver. The payment timeline is not currently known, yet the hope is that direct deposits will begin in April 2020. All payments should be delivered by the end of the year.

AMOUNT: The payments will be a maximum of $1,200 per person or $2,400 for Married Filing Jointly taxpayers. The maximum payout will apply to anyone who made $75,000 or less individually or $150,000 or less as Married Filing Jointly. This amount is based on the relevant tax return’s Adjusted Gross Income. There is no minimum income required in the final version of the bill as was initially planned. The payout phases out from $75,000 to $99,000 individually and from $150,000 to $198,000 for couples. The phaseout reduces by $5 for every $100 over $75,000 ($150,000 for couples).

You can calculate your own payment amount here.

Important to note: Your 2020 income is technically the basis for this payment. Thus, once you file your 2020 income taxes, you may be eligible for a “true up” tax credit if and only if your adjusted gross income is lower in 2020 than in the tax year used for the payment sent to you in April 2020. If your 2020 income is higher, you will not have to pay back any difference in the payment.

This payment as of this current bill is a one-time occurrence meant to assist Americans in paying their necessities and bills. If the pandemic worsens, more action may be taken by Congress.

HOW TO USE IT: So that’s the politics and logistics of the stimulus package. Now, even more important as figuring out how much money you will receive is what you should do with that money. This is where personal finance education comes into play. I am not a financial adviser, and my opinions should not be construed as financial advice but merely as opinion and education.

Many Americans will not have a choice of what to do with this money. That’s exactly the point of these payments after all. The government wants to target the majority of people who need this money to survive and pay for their necessities. Thus, those folks (which might be you) will almost immediately spend that money to not fall (possibly further) into debt.

If you are the lucky ones to receive this money and do not need to spend it on necessities, there are a few options you may want to consider. Before you do anything with the money, I would urge you to evaluate as concretely as possible just how likely you could be laid off from your job as a result of the impending recession.

If the probability of losing your job is high, I would strongly consider saving the cash payment and any other money possible in a savings account. Most financial advisers recommend having 3-6 months of expenses in cash for an emergency such as a unemployment or loss of income. You might need closer to that 6-month amount or more if you work in a highly specified field where a replacement job would not be easy to find quickly. The timing recommendation is based in the data. Even during the Great Recession of 2008, the median amount of time required to find a job peaked at 10 weeks. Thus, 3 months of expenses saved in cash could be a safe measure for you.

If the probability of losing your job is low, you could explore a few options:

If you already have your emergency fund of cash savings, you could pay down high-interest debt (perhaps anything over 5% interest). Especially credit card debt payment is a solid place to put your tax rebate as the interest rate average is 15-19%. As a general rule, rolling credit card debt should be avoided if possible as the interest rates almost never will be lower than your rate of return on other potential investments.

Next you could save the cash for any near-term goals like purchasing a home, paying for a wedding, or buying a car. These near-term goals are typically defined by financial advisers as anything you need cash for within 5-7 years; some say any goal within 10 years should be saved in cash. This cash could be saved in a high-interest savings account where interest hovers around 1-2%; this won’t yield much unearned income, but it will likely fight off some of the effect of inflation devaluing your money.

Another place to put your cash payment could be to fund a mortgage refinance. As the Federal Reserve has lowered its own interest rate target and the economy slides into recession, this usually but not always means lower mortgage rates are on the horizon. Thus, you could use the cash to fund your closing costs on the new mortgage at a lower interest rate. Of course, do your research and speak to a professional on the necessary considerations of refinancing.

If you have these goals covered, you could look to investing in the financial markets. Remember the old saying, “Buy low; sell high?” Now as the markets come crumbling down from the recession, many stocks and investments could be seen as a great buying opportunity. Timing the market trying to get the best deal does not typically work out. Instead, more often time in the market is a safer, more successful bet. Thus, you could try investing a little bit of your cash payment at a time at intervals like each week or month. This method is called Dollar Cost Averaging limiting your risk of incorrectly timing the market. You could do this within your own retirement account, an investment Health Savings Account, or a taxable brokerage account.

Overall, you must individually evaluate your own near- and long-term future and goals. Plan out what your purchasing goals are, and estimate the rate of return you could earn each place you could place your money. While a savings account could yield 1-2%, you could save thousands with a mortgage refinance, or a stock market investment could yield possibly 10% (which is the average over time). Think critically and concretely about what this pandemic and recession might hold for you, and then make a move.


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