In the coming weeks many households will likely be getting some financial help from Washington. A new round of stimulus checks and a supplemental federal unemployment benefit was finalized in late December. There’s also the possibility that many households with college loans may be getting a big break, as the Biden administration is considering student loan debt relief. And we’re also heading into federal tax filing season. Last year most filers received a refund, and the average was more than $2,500.
For those of you whose households are struggling through unemployment or have less income right now, I know any extra money coming in will be needed for essentials. I only wish the assistance for those most in need had been more substantial.
But for those of you who will see a boost in household cash flow that you don’t need to cover essentials, I sure hope you have a formal plan for how you will use the extra money.
I want to repeat advice I have been giving ever since the pandemic began: I would prefer you put your emergency fund ahead of paying down credit card debt. You must, must, must pay at least the minimum due on every credit card bill. But as much as I hate high-rate credit card debt, I hate the thought of your household being financially vulnerable even more. An emergency fund of at least eight months of living expenses (and ideally as much as one year) is the best way to be able to take care of yourself whenever the world throws you a serious curveball. So for now, consider paying the minimum on your credit card bills and using any extra income to build up your emergency fund.
And I can’t overstate how important it is to hatch a plan for the possibility of having student loan debt forgiven. To be clear, right now we don’t know if it will happen. But that’s the perfect time to strategize what you will do if you no longer have a $200, $300, $400 monthly payment.
That is a serious amount of money. My advice is that at least 80% should be directed to needs, not wants.
Starting with an emergency fund.
For those of you living at home who want to move out on your own, you can likely save up a security deposit in just a few months. And if you are working and haven’t yet started saving for retirement, this is the year you open a Roth IRA. Do you hear me?
Don’t blow this. You can’t tell me you can’t afford any of that. The whole point is that you have been making the monthly payments on your student loans. If you get any relief, you have an amazing opportunity to redirect that monthly payment to building financial security.
And I challenge everyone to come up with a plan for what they will do with a tax refund. Right now, without hesitation or thinking for more than 20 seconds, answer this question: “What’s the one financial step you’d love to take that would make you feel less stressed?” If I were you, that’s the goal I would focus on when your tax refund hits your bank account.
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