By Erin Lowry
Stimulus checks have started arriving and that means it's time to make decisions about how to best use them. For many people – especially the more than 26 million people who have filed for unemployment benefits over the last five weeks – there's little to no choice. Much of that money likely will be spent on necessities.
But people who are still working may have other options. Under normal circumstances, financial counselors often encourage clients to put large sums that come in, like a tax refund, toward debt.
We're not living in normal times.
Unemployment claims are staggering and it's unclear when the majority of Americans will be able to resume normal activities. Even when we do, there's no guarantee people will be returning to pre-coronavirus jobs and life. So what do you choose: building up an emergency fund or paying down debt?
Who should pay off credit card debt
Despite the millions of people in financial hardship right now, aggressively paying off debt may simply feel like the right choice for some people. And it can make sense depending on your personal circumstances.
"If you are in a stable or essential job right now and have a fully-funded emergency fund, then you're one of the lucky ones," says Jessica Moorhouse, a money expert and financial counselor. "You have the financial stability and luxury, quite honestly, to continue to pay off your debt aggressively to reach your debt-payoff goal sooner."
Kriselle Gabriel, a marketing professional and podcaster, and her husband decided to put $2,200 of their stimulus check toward his credit card debts instead of padding the couple's existing emergency savings fund.
"While we are not at our current savings goals, we aren't spending much money outside of food, so we decided to take advantage of our time not spending money to pay off large chunks of our debt," says Gabriel, whose job is steady, but her husband's job has been furloughed. The remaining $200 went toward some small home goods the two had been eyeing, including a milk frother, chef's knife and a garlic press.
But experts caution that you should be realistic about your cash reserves before making that debt payment.
"Remember, no one receives a refund on a debt payment," says Kassandra Dasent, financial wellness engineer and CEO, BridgeTech Enterprises. "Therefore I suggest that people assess their personal and financial situation before committing themselves to any major financial decisions."
After all, you can always make a lump payment toward debt in the future when your personal situation has stabilized and no longer is shrouded in uncertainty.
Building up an emergency fund
Paying off debt may feel rewarding, but for millions, the need to preserve cash is more important, given uncertainty about the future of the job market.
Amanda Holden, a financial educator and founder of Invested Development and the Dumpster Dog Blog, encourages people to focus on savings first because, without the cash to cover bills after a job loss, it's likely you'll end up with high-interest rate debt.
"In general, I think people should approach financial planning during an economic shock with the mind-set that they're going to lose their job next month," says Holden. "The worst that happens is they're better prepared."
This thought process is exactly what motivated De'Ja Ramil, a senior accountant, to save her check.
"If I pay off debt with the money and my situation takes a turn for the worse, and I have used all my resources, then I will just end up using my debt resources once again," says Ramil. "By keeping the money on hand, I can continue to make my minimum payments and have funds for emergencies if needed."
Ramil plans to move the money into a savings account for a down payment on a home if she or a loved one doesn't end up needing the cash during the COVID-19 crisis.
All or nothing?
"It doesn't need to be all or none," says Douglas Boneparth, CFP and president of Bone Fide Wealth. "The more secure you feel the more you can throw at your high-interest debt."
Laura Duppstadt, a barista, used $500 of her stimulus check to pay off her student loan with the highest interest rate. Duppstadt is still working and able to pick up extra shifts from those on leave of absence, plus she makes hazard pay and gets tips. Duppstadt also has six months of bare-bones living expenses saved. Because her financial situation feels stable, Duppstadt allocated part of her stimulus check to be spent in her local economy and stashed the rest in her rainy day fund.
"When I talk to business owners who come to my work, they are scared," says Duppstadt. "They still have to pay rent on their business space and staying open is their only hope. So I decided to spend 20% of my unexpected income to help them."
Maire Hunter and her husband put $2,000 of their stimulus check into the couple's emergency fund. Even though both Hunter and her husband are still working full-time and they have healthy cash reserves, Hunter is six months pregnant with a special needs child who may require additional medical care. The remainder will be used to help others.
"We kept back $400 of the $2400 stimulus for on-hand cash, donations, and local investment spending," says Hunter.
Erin Lowry is the author of "Broke Millennial Takes On Investing" and "Broke Millennial."