The Personal Finance Podcast - What to do With Your Stimulus Check (Should You Blow it All in One Place?)

Episode Date: January 27, 2021

Episode 38: What to do With Your Stimulus Check (Should You Blow it All in One Place?) In this episode we cover:  What to do with your stimulus check  Why most People stay broke  How to decide how to spend financial windfalls  Why money buys freedom  Make sure to check out the episode sponsor Turbo Debt: www.turbodebt.com/FINANCE Stuff I Recommend!  M1 Finance Best Place to Invest  Personal Capital Free Wealth Management and Budget App  CIT BANK (Best Savings Account) ** Some links may be affiliate links and we earn a small commission at no extra cost to you. We only recommend products we truly believe in.  Learn more about your ad choices. Visit megaphone.fm/adchoices

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I'm your host, Andrew, founder of dollar after dollar.com. And today on the personal finance podcast, we're going to talk about what you should do with that stimulus check that you just got. And one of the biggest things to consider is how do you handle financial windfalls? When you get money that you aren't planning for, how do you handle that money? Because understanding how to handle money correctly when you get a financial windfall will allow you in the future to become so much better with your money. Because if you can't handle a small financial windfall like $600, how do you expect to handle a large financial windfall when you receive something, say, like an inheritance

for $50,000? So you have to understand how to handle your money as it comes in. And what most people do is when they get a financial windfall, fall, they go ahead and just spend it. They act like it's just extra money that they can use and go ahead and just blow. And you can absolutely blow that money if you have some of these other things in financial order. But if you don't, some of the best options for that money is to start building something for your financial future and start building wealth for you and your family. Even if it's a small amount like 600 bucks. The reason why is once you start putting that money to work and

putting it towards your future, you're going to have a significant, significant difference in change in mindset because you're going to start to see that money grow. And as that money grows or as that money pays down debt or whatever you're going to do with it, it starts the snowball. The snowball starts rolling downhill. And as you add to those funds, you're going to see a massive difference. And we're going to get into this episode on the difference it will make if you just invest that money or the other options that you have with that money and how to treat this money in terms of what you need to do for. Because this can work for any situation, whether it's $600 or $2,000 stimulus check, it doesn't matter. You have to go through the same checklist to see what you should be doing

with that money. And with the first round of stimulus checks, what happened for most people is they said the majority of people went out and bought TVs. That was the number one thing that people bought. Most people already had TVs and they went out and bought additional TVs or they upgraded their TV. And this is why people stay broke. They get a financial windfall and they use it right away for things to consume. They want to consume more things. And anyone with that mindset, you get a financial windfall and you just want to blow it all, anybody with that mindset, it doesn't matter who you are, doesn't matter how much money you have, you will stay broke. If you have all your financial basis covered, you're hitting your savings goal, you're not in debt. You don't have any financial

issues. Then you can blow that money. No problem. No issue there. But if you're 30,000 dollars in credit card debt and you're throwing up $600 over at a TV to upgrade your TV, then you have a major problem because you're just getting deeper and deeper and deeper and deeper into credit card debt. So today, what we're going to talk about is the things that you should look at, depending on what financial situation that you're in and how to spend that stimulus check. But you can apply this to any other financial windfall. You can go through the same ideas if you got an inheritance or if you got gift money. It doesn't matter what you got.

The same principles apply. So let's get into what you should do with your stimulus check. So the first thing to look at is that if you don't have an emergency fund, you need to strongly consider starting an emergency fund with a stimulus check. The reason why is that most people who do not have an emergency fund stay broke their entire lives. And there's a bunch of examples of reasons why this happens. But not having an emergency fund means that if something comes up, if a problem comes up in your financial life, whether your car breaks down or your water heater breaks down. Something goes wrong. If you don't have an emergency fund, you will not have the funds to

cover that. And it's not if an emergency is going to happen. It's when is an emergency going to happen. So you absolutely always have to have an emergency fund. And if you don't, this is a great windfall to start an emergency fund. Because what you want to do is at least get a thousand bucks in that emergency fund and then grow it from there so that you can get three, six, nine, twelve months of expenses in that emergency fund. Now, emergency funds aren't to only protect you from things going wrong within your financial life. They're also amazing opportunities to take advantage of things that come up in life. Let me give you an example. Let's say you get offered a job across the country and it's a much higher paying job and you have this amazing opportunity in front of you, but you don't have the money

for a move. This happens all the time. Now yes, you can negotiate to try to get money to move across the country, but if they say no, you can't take advantage of that opportunity. And this is where a lot of people get stuck. And a lot of people stay in the paycheck to paycheck cycle because, A, their car breaks down or something happens where it's a significant financial down payment that they have to put down for something. And they don't have the funds to pay it. And so they go backwards and lose all their money, or they go into debt, and then they stay in the paycheck to paycheck cycle. They can never get ahead because stuff always happens. Problems always come up. And you have to have the money to pay for it. Or they can't take advantage of opportunities when they arise. Those are the

two things that constantly come up for people who stay in the paycheck to paycheck cycle. And if that's you, then you need an emergency fund because it's going to save you in so many situations that you don't know or coming. But they're coming. I promise you they're coming because it happens to everyone. Your car is going to break down. Your house is going to have issues. So make sure if you don't have an emergency fund, start putting money towards that. And this is a great opportunity and a great financial windfall to allow you to do that. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible. And if you've ever been there, you know how stressful this can be. That's where Indeed comes in. When it comes to hiring,

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Ooh, then it's the vacation of a lifetime. I wonder if my out of office has a forever setting. An IG private wealth advisor creates the clarity you need with plans that harmonize your business, your family and your dreams. Get financial advice that puts you at the center. Find your advisor at IGPrivatewealth.com. Number two, you want to look at paying down debt if you have debt. See, debt is a pants on fire emergency. Having debt is taking you from financial freedom to just bringing you down more and more and more. If you have debt, you're going backwards because interest is working against you. And I always talk about the power of compound interest and how

compound interest is the most powerful thing in your financial life. But if you're in debt, compound interest is working for somebody else. And the amazing thing about this is, if you pay off that debt, you're going to realize how much more money you have. And if you start allocating those funds towards investments, you're going to start to see your money compound. And it's going to grow. And it's one of the most unbelievable things to see that turnaround. But getting rid of debt is the first step towards that. Now, you may be thinking in your head, well, I got a $600 stimulus check, and I have $30,000 in credit card debt. How is this even going to help?

Every step helps. You know why? Because it gives you more freedom as you start paying down that debt. Every dollar you put towards that debt is a dollar you're putting towards your freedom instead of other stuff. And so making sure you're paying off that debt

to get you out of these situations. Imagine a person who has no debt and has a large emergency fund. How much power they have with their money? Because now every dollar that comes into them, they can invest towards their future and every dollar they invest towards their future is now compounding and working for them. It's like having an army of people working for you, and slowly that money begins to grow,

and it begins to snowball and grow bigger and bigger. And that's how you have to think about these concepts. If you have student loans, that's a great opportunity to put it towards your student loans. A lot of student loans have a very high interest rate, and getting rid of that interest rate as fast as humanly possible is extremely important. Or you can make an extra payment towards your mortgage or your car. If you have a mortgage with a high interest rate, it's absolutely worth it to make the extra payment. Or if you have a car payment with a high interest rate, then it's absolutely worth it to make that

extra payment to get that debt down. See, your debt's not going to go anywhere unless you take action towards it. If you see that your debt is eating into your life, it's eating into your financial life and the majority of your extra money is going towards that debt, then you truly, truly need to put as much money towards that debt as possible. I know you're tired of paying down that debt. I understand that. And you think sometimes when you're...

you get a financial windfall like this, you just want to spend it on yourself. I get it. But at the same time, getting rid of this as fast as humanly possible will literally change your life because once you get rid of that debt, the extra money goes towards investment, the compounding turns into wealth, and all of a sudden you're going to see the massive difference that it makes. Number three, investing. Now, if you have a 401k or a Roth IRA, this is a great opportunity to invest this money and get the ball rolling. Because as we all know, the more money you put into these accounts, compound interest is just going to do its thing. And here's an example of that, because if you got $600, okay, let's say you just invested $600 and didn't put anything else

in there besides the $600 and just let it sit for 30 years. That $600 turns into $6,000 in 30 years. Or if you're married, let's say you got $1,200 and you invested that $1,200, in 30 years, that's going to be $10,000 if invested in an index fund. Without touching or adding any more money at all. And that's the power of compound interest. So you can say, to yourself, hey, do I want this to be $600 now or do I want it to be $6,000 in 30 years? Is that TV worth $6,000 to you? Because that's exactly what you're paying for that TV. Not thinking about the future value of that money is a huge mistake that most people make. That's why every purchasing decision matters. And if you want to buy more things that bring you value,

then the best option is to increase your income. And that's why we talk about increasing our income all the time because you should be able to buy the things you want to buy. And increasing your income is the biggest step towards that. Number four, save it towards a down payment. Now, if you're looking to buy your first house, one of the best things to do with this money if you're not in debt and if you have an emergency fund is to start saving towards your down payment because every extra dollar towards your down payment is going to help. And in a future episode coming up here, we're going to be talking about how you can buy a house with a low down payment. I'm going to go through the whole process of how you can do

that. But saving financial windfalls towards a down payment if you don't have a house yet is an amazing way to spend this money. A, it puts you one step closer to buying your first house, but B, it also puts you one step closer to buying an asset for your financial future. And once you hear that episode of how little you have to put down on a house, especially if you're a first time home buyer, then this can make a significant impact towards that number. Because being able to put down such a low down payment and getting into something that's going to build wealth for you and your family as long as you buy it right is going to have a significant impact. So look into saving towards your down payment if you have all the other basis covered. Number four, if you have kids, put it towards your kids college fund.

Now, if you never started saving for your kids college fund and you're not sure if your kids are going to college, there's a couple options here. Option one, and we'll get into this in a future episode, but option one is that you could just put it in an investment account. You could just put it to the side in an investment account. And if your kid doesn't go to college, You don't have to worry about it. You can either give them the money or you can put it towards your retirement. Option two is you can put it into a $529 account. And while that is, is a tax-free account that you can put money in towards your kids' college

and you can actually invest this money. And it's a great opportunity. This is what I do for my kids, but it's a great opportunity to put money towards your kids college, invest to that money over the course of 18 years while you can start a $529 account right when they're born. Invest that money for 18 years. Let that money grow as you continue to. contribute to it and you're going to have much more money by the end of the 18 years because you're

investing it than someone who would just put it in a sock drawer to the side. And so it's a great option to start saving early because $600 over the course of 18 years is going to be a significant sum of money. If you start adding $50, $100, $200 to that, you're going to really help your kids out when they go to college. Now, the downside of the 529 plan is you do have to pay a penalty if your kid doesn't go to college and you don't use those funds towards college. And it's 10% penalty if you do it that way. But there's all sorts of ways that you can get around that where you can do a study abroad program

and take one class in Europe and then go take a trip to Europe for free with that money. There's all kinds of things that you can do with it, but just know that risk going into it, that if you open a 529 account and your kids don't go to college, you could have to pay a 10% penalty. And that's why some people opt to just put it into a brokerage account and invest that money. The downside to that option is that you're going to

have to pay taxes on that money when you sell those securities. There's pros and cons to each side. I chose to go to the 529 route and if my kids don't go to college, I'll figure it out on that front. But weigh which option is best for you, and this may be a great way to get your kids college fund started. Along those same lines, if you have kids, you could start an investment account for your kids. This is a great opportunity to start teaching your kids about investing. Opening a brokerage account for them early on with just a few hundred bucks. It could change their life forever because they have such a long investment. horizon that any money that you put into that account, by the time they retire, it's going to be

a massive amount of money. And if you run the numbers on this, you can see they have such a long time horizon. And teaching them to start investing now will change their lives literally forever. So if you have kids, look into that option as well, because what I did with my kids was I opened a brokerage account and buy things he likes. So for example, for Disney. So I show him the Disney shows that he likes and the Disney movies that he likes. I say, hey, you're buying an investment here. Now, he can, he's not fully understanding it yet. But over time, when you ingrain these principles into them, it's going to have a major impact in their lives.

And then the last one, if you have all of these bases covered, if all of this has been done, then you can treat yourself. You can go out and buy whatever you want with that money. If you've hit your investing goals, if you paid off your debt, if you have an emergency fund, if you have a house and don't need to save it towards your down payment, and you're hitting your kid's savings goals, then you can absolutely blow that money. You can go to the ATM, get it all in ones. Just throw it up in the air if you want to.

Make it rain. But the most responsible thing to do is make sure that you hit all these points first. And if you have, then go ahead and treat yourself. Again, this doesn't have to be with your stimulus money. This can be with any financial windfall you get. So think through these options, figure out what the best option for you is in your current situation, and that put that money towards your financial freedom. Thank you guys so much for listening.

And if this is your first time listening, consider subscribing so you never miss an episode. And share this episode with a friend. And don't forget to leave a rating and review on iTunes as well, because our goal is to bring as much value to you as possible. And we're trying to spread this message that money can buy freedom. That's what money is there to do, is to buy more freedom. So thank you again so much for listening, and I hope you have a great day. Rosen lasagna, medium power, 15 minutes. Sounds like, Ojo time.

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