Forget about credit card debt and focus on building an emergency fund, the financial guru says.
The U.S. economy may soon be getting a shot in the arm. Lawmakers are in negotiations over a bipartisan $908 billion Covid-19 stimulus proposal that some on Capitol Hill expect President Donald Trump and Senate Majority Leader Mitch McConnell to back. The proposal would reinstate the $300-per-week federal unemployment benefit but would notably exclude a second round of $1,200 stimulus checks.
That doesn’t mean a second round of checks is out of the question, though. President-elect Joe Biden said at a press conference Friday that more direct government aid “may be still be in play.” And in an interview Sunday, Senate Minority Leader Chuck Schumer described the pending legislation as a stopgap, adding that he hopes Congress can pass a “much bigger bill” after Biden takes office in January.
If you do eventually end up receiving another check in the mail, you’ll likely have no shortage of ideas for what to do with it. When it comes to prioritizing uses for extra cash, focus on getting your feet under you, recommends financial expert Suze Orman, bestselling author of “Women & Money,” and the host of the “Women & Money” podcast.
“The most important building block, so that you can grow, financially speaking, is that you have a financial foundation you can stand on,” she says. “So when something goes wrong, it doesn’t collapse.”
In other words, “Would I be spending that money to pay down credit card debt?” she says. “No way.” Instead, “the first priority is save, save, save.”
New stimulus means new priorities
The March CARES Act and other early coronavirus relief programs made the priorities for recipients of stimulus rather straightforward, Orman says. “They’re not making you pay your mortgage. You don’t have to pay your student loan. You don’t have to pay your automobile insurance,” she says. “You have all of this chance to save money. So anything that comes in, just save it, save it, save it.”
But a second stimulus check could arrive at a time when some of those relief measures have expired.
The provision in the CARES Act that granted a payment freeze to 41 million federal student loan borrowers was recently extended but by just one month, through January 31. Legislation that barred your lender or loan servicer from foreclosing on your home, as well as a provision giving you the right to request mortgage forbearance due to Covid-19-related financial hardship, expires on December 31.
“Now you’re going to have to prioritize. Where do you have to spend that money?” Orman says. First save as much as you can. “Next, prioritize the must-have bills that you must pay. You must have money to pay your rent, your car payment, your insurance, your student loans.”
Use a second stimulus check to build your emergency fund
The pandemic has shown us how long a crisis with the power to cripple your finances can last, Orman says. Accordingly, she adds, the long-held rule of thumb among financial advisors — that you should hold 3-to-6 months worth of expenses in your emergency fund — needs updating.
“Even eight months of an emergency fund isn’t enough. It is eight months since this started. It’s longer than that. It could be even longer than a year,” she says. “So the truth of the matter is, it’s probable that you should have one year of an emergency fund right now.”
The money you receive from any future stimulus check won’t cover a year’s worth of expenses, but stashing a chunk of that cash in a savings account can be a good place to start.
Storing away, say, $1,000 would put you ahead many of your peers, according to a recent Bankrate survey. It found only 41% of respondents had enough savings to cover a $1,000 expense.
If plunking in a lump sum sounds daunting, you can also build an emergency fund gradually. Contributing $36 a paycheck will get you to $1,000 in a year. To reach $3,500, the amount Bankrate says an emergency typically costs, you’d have to put aside $135 per pay period.
Keep cash flowing and stay flexible
If money is tight, Orman says, working to pay off debt should be low on your to-do list. Instead, she says, “I would be paying the minimum payment due on all credit cards. And I don’t care what the interest rate is.”
That’s because, if you’re low on cash, and the money you have coming in is from government stimulus or unemployment benefits, you need to save as much as you possibly can, she says. And unlike, say, a mortgage or auto loan, in which the item you’re financing is used as collateral for the debt, “credit cards are unsecured debt. If you have to, you can always get them discharged,” she says. “Obviously, it would ruin your FICO score, but you would be able to continue to live your life.”
Living through this crisis underscores the importance of being prepared, Orman says. If you still have a paycheck coming in, she says, it behooves you to make sure you have credit cards with plenty of available limit on them. And if you own a house, it’s worth considering applying for a home equity line of credit, which could provide you with access to cash in case you lose your job or face unexpected expenses, she says.
“All of those things are essential lessons that we should have learned to prepare us for the unknowns of the future,” Orman says.
