What Economists Say About How To Use Stimulus Checks

Round three stimulus checks are coming! Is it economically irresponsible to not spend it? I mean, it is meant to stimulate the economy, right? What have we learned from the impact the last stimulus checks have had on our economy?

What the Economists Say

With the third round of stimulus checks being sent out, I’ve been curious how the last two rounds have influenced our economy. Here’s what I found.

Despite these being “stimulus checks,” the National Bureau of Economic Research actually found that of those surveyed on the use of their checks, only 15% reported they spent the majority of it. Another third of people said they saved the check and the rest put it towards debt repayment.

Of course, many of those people split their use between the three categories. But that 15% surprised me. It seems really low for the number of people saying you should go out and help the economy with the money you received.

Economists say that during an economic downturn, people tend to stock up on savings a bit more. Not surprising. What did surprise me is that from my research, there were fewer people than I expected who said that not spending the stimulus checks was hurting the economy.

This was, I think, for a variety of reasons.

1. Spending Options

For one, the National Bureau of Economic Research made note in their study that the downturn in the economy provided fewer options for the spending of money. Even for those who were ready to spend money, restaurants weren’t working at full capacity, many stores were closed, and non-essential activities were not operating.

2. Personal Decisions

Second, I think many people realized this pandemic has been incredibly personal. Personal financial problems result in personal financial decisions, not necessarily decisions that are “best for the greater economy.”

3. Broad View of the Economy

And third, many economists and those in the financial trenches have a broader view of the economy as it pertains to people’s personal finance.

Greg Mcbride, the Chief Financial Analyst of Bankrate, said this in a recent NBC article,

“This is the short view versus the long view. In the short term, stimulus money put in savings or used to pay down debt may not give an immediate boost to the economy, but households that have more savings and less debt are in a better position to spend on a consistent basis going forward,”

He continued by saying,

“Even among people who don’t have immediate plans to spend that money, that doesn’t mean it’s not going to get spent”

I thought this was an insightful viewpoint. McBride makes it clear that he doesn’t have a problem with increasing savings and paying down debt with stimulus checks. Furthermore, in the same article, the NBC contributor mentions the possibility that once the pandemic is over, the extra savings may supercharge extra spending.

Contrary to what has been thought in the last year, it seems much of the stimulus checks will go towards longer term economic recovery. So, what do we take away from this? Let’s look at what your impact is on this economy. As the next stimulus check arrives, keep this in mind.

You Are Your Own Microeconomy

Economies get smaller and smaller as you move down the ladder. If you look at the world’s economy, we see the economic effect of nations on other nations.

We zoom in a little and we see our own national economy and how money moves across different sectors and geographies. Zoom in again, and we see our state’s economy. Again, we get closer and see our local economy and money in the hands of real people we know and love. Zoom in once more and we see the economy of our own household.

It’s like we’re all little nations. We’ve got our own GDP (what we produce) and our own imports and exports (what we buy and sell). There’s exchanging of goods and services; money comes in and money goes out.

When you look at economics, you see can see how improving a smaller economy helps the economy at large. If Ohio’s economy improves, industry increases, unemployment decreases, and that only helps the national economy of the United States.

It’s got ripple effects into other states and other industries.

So, it stands to reason that our own microeconomies of our households also works in the exact same way. When we are overextended, when we spend too much, when we are putting money towards debt, it hurts our own personal microeconomy. And it trickles into other economies as well. Local, state, national and world.

My point is this: We don’t have to spend our stimulus checks because they are stimulus checks.

What we should do is improve our own microeconomy so that it influences the economies higher up. And much of that improvement can come from saving and paying down debt. It seems a bit counterintuitive given the “stimulus checks,” but as Greg McBride says, just because money isn’t being spent now doesn’t mean it won’t be spent in the future.

What to do With Your Stimulus Check

Having said that, how should you handle your next stimulus?

If you are in a circumstance where money is particularly tight, especially if you have no job, focus on the four walls first. That’s food, utilities, housing, and transportation in that order. The number one priority is to make sure you have these four categories covered.

1: Food. Keep food on the table!

2: Utilities. Keep the electric, water, and gas turned on in our homes and apartments.

3: Housing. Stay up to date on our mortgage and rent. Gotta keep that roof over our heads!

4: Transportation: Ensure you’ve got transportation taken care of so you can keep making the money at work if you are fortunate to have a job.

Here’s another post I wrote during the last wave of stimulus checks where I cover the 4 walls in greater detail.

The Baby Steps of Personal Finance

Next, we look at a starter emergency fund. Do you have $1000 saved for emergencies? Put your stimulus towards that if not. It’s not going to feel like a lot because it isn’t, but it’ll provide some cushion as you move into the next baby step of personal finance. Here’s a post breaking down Dave Ramsey’s baby steps for reference.

Next step is paying off all non-mortgage debt.

After that, you build a full 3-6 month emergency fund.

ONLY THEN do you begin investing for retirement. Now, I know it’s tempting to just throw that stimulus money into the stock market or bitcoin because of how it is going up. But DON’T. Not when you have bills and debt and no emergency fund.

As I’ve mentioned in this video, you may feel like you’re missing out on this market and the magic of compound interest, BUT, paying off debt has the same effect as investing when it comes to your net worth. Both increase net worth and you mathematically experience the same benefits of compound interest with both. Except, when paying off debt, you decrease risk in your life.

Once you get that full emergency fund, you can decide how you want to spend your stimulus check. Put it towards baby steps 4, 5, and 6, by saving for retirement, saving for kids college or paying extra on the mortgage principle. Or you can increase your generosity and give some to a person or organization that needs some extra help during these times.

However you choose, you’ve got some options, just don’t let the unnecessary options (like going shopping) get in the way of the necessary ones (like stocking up on chocolate milk).

And just to be clear, I’m not saying that you shouldn’t support your favorite local restaurant. I get it, small businesses need our help. But don’t use the pandemic as an excuse to spend money when you’ve got your own financial problems.

How Are You Using Your Stimulus Check?

So let me pass this question onto you: How do you plan to use your stimulus check? Do you agree or disagree on the proposed usage of these stimulus checks?

I’d love to hear from you in the comments below!

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