Kevin O’Leary of Shark Tank fame suggests Americans use their stimulus checks for “paying down credit card debt”. I couldn’t agree with him more.
However, I’m disappointed to hear Suze Orman say “Would I be spending that money to pay down credit card debt? No way.”
Fortunately, Orman went on to explain, “First save as much as you can. Next, prioritize the must-have bills that you must pay.” Nice save, Suze.
How can financial experts disagree on such a simple question?
Because in Kevin O’Leary’s opinion, paying off credit cards is the best investment people can make. Credit cards have an average interest rate of 15% that can double or more if you fall behind. Looking at it this way, like I think O’Leary is, it’s vital to pay them off.
But, Suze Orman is taking a holistic approach asking where your finances are overall. Do you have an emergency fund, money for groceries, utilities, etc.? If you can’t put food on the table, gas in the tank or turn on the lights, paying credit card debt falls on the priorities list.
What Would I Recommend?
When the first stimulus checks came out in April, I warned attendees of my webinar for Engage! Cleveland that the pandemic might last longer than we expect. I quoted Benjamin Disraeli: “we must hope for the best, but plan for the worst”. Because of all the uncertainty, I advised everyone to hold on to their cash.1 Not physical cash necessarily – I didn’t expect this to begin the apocalypse – but to keep money in the bank rather than spending it, paying off debt or even investing unless they had a significant emergency fund.
Why? Because once the money is out of your hands you lose control over it. I even went so far as to advise a friend against paying ahead on student loans. His loans were in forbearance, meaning no interest was accruing so the benefit of paying early was gone. Plus, if he later needed the money he couldn’t exactly ask for it back from the lender. My advice to him: set the money aside each month and pay a big chunk when things settle or interest begins to accrue again, but have the money accessible for an emergency.
My opinion lies somewhere between Kevin and Suze’s this time: as always, I would pay at least the minimum on credit cards because the penalty for not paying and the impact on credit score are so significant and long-lasting.
The minimum required payment should be made on other bills too to avoid being sent to a collections agency. Then, I’d create or add to an emergency fund with any stimulus money received.
Beyond that, my priority would be paying off or paying down any remaining bills. Someone with a three- or six-month emergency fund might focus on paying off high interest debt (anything over 10%).
What about Investing?
Only after the above are complete would I consider investing stimulus money. If you reduced or eliminated contributing to a 401K you might begin to invest again, especially if your employer matched your contributions.
Here’s the IRS’s FAQ about the second round of payments.
Please share your thoughts in the comments area below