Don’t Spend Your Covid-19 Stimulus Check

It looks like congressional Democrats and the White House will get those $1,400 stimulus checks out the door in the next few weeks. Economists and the government are hoping you spend 100% of that money immediately to boost the economy. A booming economy would be a good thing, but that doesn’t mean you should spend your whole check. Instead, consider this a once-in-a-lifetime chance to chip away at your debt, pay off high-interest credit cards or start building your savings.

Having more cash on hand will be a good thing. Many people, according to the Fed, can't even find $400 if they need it. When people don’t have emergency funds, their lives can spiral out of control. People in debt find themselves more likely to ask family and friends for loans and gifts, which can strain relationships. Without a cushion, people become more likely to draw down their retirement savings, use credit cards or payday loans, pawn or sell possessions, and take on extra jobs. No wonder people in debt are more unhappy and stressed. Saving some of your stimulus check may be able to save you from these negative effects.

The power of compounding interest is astounding — let that be a saving and anti-debt motivator. If you put $1,000 away now, forget about it, and earn 5% per year on it, you will have over $1,200 on the next inauguration day in 2025. That might not sound like much, but you didn’t sacrifice anything to get it. And if you seed your account with $1,000 and save just $83 per month, you’ll have over $5,700. In contrast, if you go on a stimulus-check spending spree and add debt to a credit card with a 17% interest rate, you will be over $7,700 in the red.

Putting the money toward retirement would also be a good idea. If you’re 35 and put $1,000 in a retirement account and each year add $1,000 more, you will have about $74,000 when you are 65. If you wait until you’re 55, you will have to put $37,000 in an account and save $1,000 yearly to get to the same amount. When you are young, time is on your side. If you save, say, 5% of your pay in your 20s and 30s, you might not even notice; if you wait until your 40s, you will have to save two to three times that much just to get to the same place.

In this round of Covid-19 relief, Congress reduced eligibility for the stimulus checks over concerns of “too much saving.” (In the proposal, married couples earning up to $100,000 in annual income, or individuals earning $50,000, are eligible.) Last spring, households spent only a portion of their checks on things like groceries and regular bills during the first 10 days after receiving their checks. During the summer, a study found that households had spent just 40% of their stimulus money. But people in the 17% of households who live paycheck to paycheck — which we can roughly cut off at two-earner households with an income of $100,000 — spent 68% of their stimulus checks. These are the very people who also report that they’d have trouble coming up with $400.

This explains why some policy makers were hesitant to send out more checks. What good is a government check that goes unspent? The White House is hoping to spur a spending spree. While the macro effects from spending would be good for the economy, the effect on your individual household — not to mention your head and heart — might be negative.

Economists, including me, are watching closely what you and over 200 million Americans will do with your stimulus checks. I, for one, hope you’ll consider emerging from the pandemic more debt-free and saving-conscious. If we’ve learned one thing from the past 12 months, we don’t know what’s coming. So it’s best to be prepared.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Teresa Ghilarducci is the Schwartz Professor of Economics at the New School for Social Research. She's the co-author of "Rescuing Retirement" and a member of the board of directors of the Economic Policy Institute.

©2021 Bloomberg L.P.

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