Should stimulus be debt relief?
Start an emergency fund if you don’t have one
Many Americans already have their third stimulus checks in their bank accounts, or will soon receive them via mail or direct deposit. These payments are for $1,400 per eligible adult and dependent.
If you owe money on a credit card or other high-interest debt, what to do with your funds may seem obvious: Use the money to reduce your balance. However, while that can be a good use of the funds, it’s not the right choice in every situation.
In fact, there’s one circumstance in which you could regret paying off debt with your stimulus funds.
Paying off debt isn’t the best choice if this is true
You could regret repaying debt with your stimulus check if you do not have any emergency funds and you use the entire amount to reduce your debt.
When you have nothing in your bank account to pay for surprise expenses, even a minor financial setback can turn into a major calamity. Sometimes, expenses come up that can’t wait, from an appliance that stops working to an unexpected medical issue. Without an emergency fund, you’re stuck scrambling to pay for them.
Instead of leaving yourself unprotected against such surprises, put some or all of your stimulus money into an emergency fund. Though it means you will have to pay more interest on the debt that you’re working on paying down, you’ll avoid ending up in a worse situation if surprise expenses arrive. If you pay down debt, then face an unplanned emergency, there’s no guarantee you’ll be able to borrow again to cover it. You could also get stuck borrowing at a higher interest rate.
Even if you can charge the surprise expense with the credit card you paid off, a setback can be demoralizing. You can get stuck in a cycle of paying back debt, borrowing again, then working to pay it back again. This can make it tough to become debt-free for good.
So if you don’t have an emergency fund, consider starting one. Aim to save at least three to six months’ worth of expenses, but any contribution you make to get it started is beneficial. It can cushion you against bumps in the road so you can feel comfortable paying off your debt without worrying about borrowing again.
Put some or all of your stimulus money into an emergency fund.