How Not To Waste Your Stimulus Check

How Not To Waste Your Stimulus Check

The following is a guest post from R.J. Weiss, Certified Financial Planner, author and blogger from thewaystowealth.com.

For most people, it’s a rare occurrence to get an unexpected yet significant sum of money deposited into their bank account.

But with the recent round of U.S. stimulus money going out, as well as the new administration in the U.S. promising additional relief, that’s exactly what has happened — and what may happen again in the near future.

In researching some data for Mark’s post, I found U.S. households hold on average $5,300 of cash. So an unexpected “windfall” of as much as $2,000 per adult represents a significant change. This is a scary stat unto itself I know…

So, I believe for any recipients of this money, it’s critical not just view this as free money but rather an opportunity to improve both your short-term and long-term financial situation. Just like Mark’s FI journey below:

The six phases of financial independence

Whether you’re from the U.S. or Canada or live anywhere else for that matter, I hope you feel the same!

Mental Accounting

One of the more fascinating concepts in behavioral finance is called mental accounting. I saw it with my some of my clients in the past.

Mental accounting represents a cognitive bias, which is a systematic error in our thinking.

Compare these two examples of acquiring money:

1. Finding a $100 bill on the ground (U.S. or Canadian take your pick!)
2. Earning $100 from a full day of back-breaking labor.

At the end of the day, both methods add $100 to your pocket. But how we view — and therefore, how we allocate this money — often depends on how it was obtained.

For most of us, the tendency would be to splurge after finding $100 on the ground; to buy something we wouldn’t have, or to make a quick short-term decision.

But when it comes to the money we earned through work, we’re more likely to think through how we want to use it.

Obviously, this is totally irrational. It’s the same amount of money, and we shouldn’t place any different value on it because of its origin.

With regard to our U.S. stimulus checks, our natural tendency is to treat them like we’d treat a $100 bill we found on the sidewalk. And specifically, to treat that “free” money differently than the money we worked hard to add to our bank account.

By doing this, we’re more inclined to make quick, short-term decisions that we may end up regretting. Hopefully most U.S. citizens don’t go down this road.

Knowing Your Financial Goals

In Mark’s interview with Canadian CFP® Steve Bridge on financial planning, they talked about the first step in the financial planning process as goal setting.

What is a Financial Plan and what should it cover?

Steve mentions with Mark:

“Without clear goals, a destination in mind, a proper financial plan cannot be created.”

In other words, it all starts with goal setting.

I agree with them!

For this reason, there’s no universal answer as to what to do with a stimulus check. It all comes down to the highest and best use of that money for your particular situation.

For many people whose income has been impacted by the COVID-19 pandemic, they need that money to keep a roof over their head and food on their table. I fully appreciate that.

For some people, the best answer is to pay down debt. For others, it might just be stashing it away in their emergency fund. Others still, can use it to help pay for their kids’ education, or maybe even use it to start a new business.

And yes, for some people, albeit maybe a minority, they may want to spend it. They could buy something they wouldn’t have spent any money on.

Financial Planning Simplified (in four phases)

Your own financial goals (I really like how Mark identifies his every year to keep him focused), we can determine exactly what the best use of your stimulus money is.

The way I look at financial goal setting is as an exercise in prioritization. In other words, with financial goal setting, you’re deciding that spending money in a certain way is better than other alternatives.

In economics, this process is known as maximizing opportunity goals.

The goal here is to know which goal(s) to prioritize while understanding and being OK with what you have to give up. Money involves trade-offs in life. For most of us, you simply can’t do it all!

The big question then becomes this: How can you narrow down your priorities?

Mark has his – but unfortunately, there’s no easy answer here — which explains why there’s an entire profession dedicated to helping people decide what their goals should be (and helping them figure out how to achieve them).

But, looking at financial planning from the most basic level, I share four key phases with you.

Phase #1: Understanding Where You Are Today

In order to make decisions about where you want to go in the future, you must know exactly where you are today.

It’s here where you’ll want to do things such as:

• Create a net worth statement, which involves tallying up your assets and subtracting your liabilities.
• Understand your cash flow, which means knowing exactly how much you’re earning and spending each month.
• Create a financial SWOT analysis, where you look at your strengths, weaknesses, opportunities and threats, as related to your current financial situation.

The end goal is to get an accurate picture of your current situation, which will enable you to make better decisions about your future.

Phase #2: Choosing Your Goals

In Phase #1, you identified where you are. Now it’s about deciding where to go.

For many of us, when we evaluate our own situation, a financial goal (i.e., a financial priority) may come to mind immediately.

This is often the case with shorter-term financial goals, such as paying off high-interest debt, building an emergency fund, or making a long-needed home repair.

Mark continues to educate many people on these important subjects.

Others may have some more thinking to do. What’s important to keep in mind throughout it all is that you’re looking to maximize opportunity cost. In other words, choose the option that’s far superior to all others.

Phase #3: Creating and Implementing Your Plan

It’s here where you’ll put your plan into action.

When it comes to spending your U.S. stimulus money, this may be as simple as one transaction, such as paying off high-interest debt or saving it in your retirement fund.

But, overall, in the financial planning process, this stage is where you’re figuring out how to allocate your current cash flow in order to achieve your plan.

Phase #4: Monitoring Your Financial Plan and Adjusting (If Necessary)

Last, but not least is monitoring your plan.

Taking a big-picture perceptive (and not just looking at your stimulus check), this is all about having certain checks and balances in place to make sure that…

1. The priorities you set remain your top priorities.
2. You’re on a realistic path to accomplishing your goals.
3. And, if not, determining what adjustments need to be made to get you back on track.

Final Thoughts – Financial Planning

When you know your financial goals, financial planning (as well as financial decision-making) becomes a whole lot easier.

Plus, it’s a lot more fulfilling because, at the end of the day, you’re getting closer and closer to what you decided was most important to you.

Mark’s site is a great example about what is possible when you have those processes down pat.

My Financial Independence Plan

Whatever you decide with your stimulus funds, consider following this four-phase process. I suspect if you give some time and reflection on this, you’ll make the best decision possible.

Thanks very much to Mark for some time on his site. Regardless if you’re a dedicated follower from Canada, the U.S. or around the world, I hope the key messages in today’s post help you out.

The Ways To Wealth* is an independent personal finance website that publishes reviews, “how to” guides, best-of lists, product comparisons and more. Since our inception in 2016, over 9 million readers have turned to us for insights and recommendations on topics as wide-ranging as side hustles, freelancing, frugal living, investing, travel hacking and everything in between.

The site’s founder and editor is R.J. Weiss, CFP®.

*U.S-based site, don’t get after me (Mark) too much on any U.S. spelling of check vs. cheque or labor vs. labour 🙂 We decided to maintain that for U.S. context.