Stop! Before you go too far planning your spending of the Coronavirus Aid, Relief, and Economic Security (CARES) Act payment, let’s take a look at the big picture. Unfortunately, the current economic downturn will be a reality for many months. Now is the time to strategize how best to manage this financially.
The first priority is to keep you and your family safe. Safety includes items like shelter and food. You may need the government relief payment to provide for these needs.
For many people, the next priority is to build up your available liquid savings. The commonly stated savings goal of three to nine months of essential living expenses is as important as ever today. The goal is to have enough money handy (in a savings account or some other safe account) that you can pay your most essential expenses.
Ideas for Building Your Emergency Savings
The CARES Act gives taxpayers a one-time direct payment, which people likely will receive in the next 30-90 days. Technically the relief payment is a tax credit from your future 2020 tax filing (due April 2021) but based upon a person’s adjusted gross income (AGI) from your 2019 tax forms. Individuals with an AGI of up to $75,000 receive $1,200; married couples with AGI up to $150,000 receive $2400. In addition, families receive $500 for each qualified child. For people with higher AGIs will have their relief payments reduced by $50 for each $1,000 in AGI. You can use a calculator provided by the Washington Post to see how much you should receive.
Consider using government relief payments to jump start your emergency savings.
Next, think of other ways to fund your emergency savings. For example, do you have any reduced costs? Perhaps you’re not paying for childcare or eating out as much? Are you spending less on transportation costs if you’re working from home? Take a close look at your usual spending habits and find money that you can transfer to your savings. Build up that savings account while you can.
The CARES Act may provide you with other saving options. For example, if you have a federal student loan, most payments can be deferred for at least 60 days and no interest will be added to the loan during this time. People with student loans should 1) check your online account to see if your loan due amount is $0 this month or 2) talk to your loan providers to ask for this deferral. (It’s not clear yet how this new law will be put into action; double-check how your account is affected.) If you choose to put your student loan payments on hold for the next few months, consider using use that money to fund your savings account.
Look at your reoccurring expenses that may be relatively small but happen monthly. I sometimes sign-up for a membership or subscription to try it out, and then forget to cancel it when I’m not excited about the product. This month, look carefully at each line of your bills. Do you understand all the charges? Are there any expenses to investigate and possibly eliminate? If you cancel one or more subscriptions, move that money to your savings.
Think creatively about other ways to build your savings account. Do you have a skill or hobby that you can use to produce income? Items you’re not using you can sell? Stash that cash in your savings.
Now is the time to build up your emergency savings.
Read other Plan Well, Retire Well blog posts on saving money: