Imagine that you have a leak in your roof. It drips and has stained the ceiling, and after months of emptying buckets after every rainstorm, you’ve decided to fix it. You replace the soggy drywall, and put up new. You carefully spackle and sand everything smooth. You diligently match the original paint, and then repaint your ceiling.
It looks beautiful.
But you neglected to fix the leak in the roof. The next time that it rains, you’re going to have a drip in your bedroom.
We often ask our clients what they would do if they came into a windfall. What if they won a lottery or inherited a lump sum? What would they do? Often, their first impulse is to pay off a bunch of debt. That impulse, however, ignores the fact that there are still cracks in their finances, and it’s going to rain again one day.
The American Rescue Plan offers millions of people this exact scenario – a windfall.
This round of stimulus payments provides for up to $1,400 for each individual. If you’re married, you can receive $2,800. Add to that up to $1,400 for each dependent. Additionally, the Rescue Plan expands the Child Tax Credit. You can receive up to $3,600 for children under age 6 (up from $2,000) and up to $3,000 for kids under age 18.
So, a married couple with a few kids could see a lump sum of several thousand dollars. It seems like an immediate life saver, but if you stretch that out over the course of a year, that $9,000 check is really only $750 dollars a month.
It’s patching the crack but not stopping the leak.
We’ve worked with a lot of folks who have been in this scenario. An inheritance has dropped a huge check in their lap, and they start dumping money into old debt. We’ve seen clients spend as much as $100,000 trying to erase existing bills.
What we try to do for all of our clients, however, is fix the leak. We help them plan for that future rainstorm.
If you find yourself with one of those windfall checks, what should you do?
The ultimate decision is yours, but here are some ideas:
- Put it in savings.
Almost every savings account offers at least a little bit of interest. Your $1,000 will grow, little by little. It’s not costing you anything to save it, and it will be there should an emergency or need arise. A Roth IRA is a great example of a savings plan that builds some wealth and is still there for a rainy day.
- Get current.
When you assume a debt – be it a credit card, an auto loan or a mortgage – you’re entering into an agreement. Someone is going to lend you money that you don’t have. In exchange, you’re going to make regular minimum payments. So long as you make those payments, that loan will still be there for you. If you have a credit card with a $10,000 outstanding balance and your minimum monthly payment is just $25, then pay that $25. Budget out that Relief windfall so that you can take that monthly monkey off of your back.
- Plan for Education.
It doesn’t take much to start a college fund. We’re big fans of the Virginia 529 Plan. It offers interest, allowing it to grow, and a simple investment of $100 per month could yield $40,000 by the time your child is 18. It’s also free from Federal taxes and you can deduct your contributions from your state taxes.
- Fix your roof.
We sort of mean this figuratively. Some investments around your home make sound financial sense. New windows or a new refrigerator can help to lower your monthly energy bills. Even if your electric bill goes down by $25, that’s 25 bucks towards that credit card debt that you owe.
As bankruptcy lawyers, we help folks find a way out of crushing debt. But a bigger part of what we do is help them plan for the future. Once we’ve eliminated those debts, our clients are ready to plan for the next generation.
The American Rescue Plan offers a generational opportunity to do that.