BALL STATE UNIVERSITY: Report: Recipients of stimulus checks should take hard look at how to spend money

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Ball State University issued the following announcement on April 23.

The federal government is pouring billions of dollars in stimulus checks to help Americans during the COVID-19 crisis, but each recipient should take a hard look at how to allocate their funds, two Ball State University business faculty advise.

“Relief Check Meets Reality Check: Some Guidelines for Optimizing the Value from Your Stimulus Distribution (PDF),” analyses how people might best use that money to bring financial stability to their household.

Stephen P. Ferris, the Bryan Dean of the Miller College of Business, and Manoj Athavale, chair the college’s finance and insurance department, accomplish this through the creation of a simple allocation model based on the severity of financial need and an individual’s investment horizon.

In the last week, stimulus checks started going out 80 million taxpayers. A single American earning less than $75,000 annually receives $1,200, and married couples who earn less than $150,000 receive $2,400. Families with children under 17 also receive $500 per child.

Ferris points out that individuals and families will be faced with a myriad of options for using the money to further their financial well-being.

“Should they use the money to pay for immediate subsistence expenses?” he said. “Or build an emergency fund? Or pay down debt? Or plan for longer-term goals?”

The Athavale-Ferris model recommends:

Individuals with acute financial need, such as paying for rent or medicine, should focus their relief check spending on immediate needs to maintain their employment sustainability and physical health.

Individuals with more moderate levels of financial need should direct some of this money to the creation of a rainy-day fund that will provide a reserve of cash to protect against emergencies and unanticipated expenses.

People with a low level of financial need can use the relief check to add to a rainy-day fund but also to invest in longer-term assets to allow for wealth creation and retirement security.

Athavale notes that the state of financial well-being reported by the Board of Governors of the Federal Reserve System’s “Report on the Economic Well-Being of U.S. Households in 2018” was not good for many Americans before the pandemic.

The report found that 25 percent of adults were either “just getting by” or “finding it difficult to get by.” Further, a sizable proportion of adults would have some difficulty with even a modest unexpected expense.

Specifically, if faced with an unexpected expense of $400, only 61 percent of adults say they would cover it with cash, savings, or a credit card paid off at the next statement, while 27 percent would borrow or sell something to pay for the expense, and 12 percent would not be able to cover the expense at all, the study found.

“The goal of this model creation and discussion is to help maximize the usefulness of this relief check in the economic recovery,” Athavale said. “It provides a useful framework for a reality check of the individual’s circumstances to guide spending of the relief check. A prudent and practical allocation of these funds will not only accelerate economic recovery from this pandemic but will also enhance individual financial well-being.”

Original source can be found here.

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