Tag Archives: Stimulus

Americans Are Using Their Stimulus Checks to Get Out of Debt

Stimulus checks for $1,400 went out this month to most Americans. I found myself wondering today, did they save it, invest it, or just blow it?

Data indicates that the biggest use of stimulus funds has been to pay down debt. A Census Bureau survey found 52% of people mostly used their checks to pay off debt, while only 28% mostly spent them.

Repeated rounds of stimulus have left households with the lowest debt levels on record:

Households finished 2020 with $14.1 trillion combined in checking and savings accounts, compared with $11.4 trillion in 2019, according to Federal Reserve data. Their debt-service burden—the percentage of after-tax income used to pay off debt—fell to its lowest level in records going back to the early 1980s.

Nonetheless, the impact of stimulus funds on consumption has been notable. Bank of America found a huge spending spike among its customers:

As the latest round of federal stimulus payments reached bank accounts, credit and debit card spending soared 45% overall last week on a year-over-year basis and 23% over two years, according to data aggregated by Bank of America.

I strongly advise people with debt to pay it off before they do anything else. If you owe money on a loan at 10%, for example, when you pay it off, you are automatically guaranteed a 10% return on your investment! And that’s exactly what it is, an investment in your future.

As someone who invests for a living, if I could get a guaranteed 10% return anywhere on earth, I’d be singing Hallelujah and dancing a jig. Take the easy win!

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My View on Markets in 2021

My main business is investment, and some recent developments have gotten me thinking about where markets are headed this year. An end to the pandemic by Q2 2021 is predicted by multiple models (here and here). We’ve seen a substantial increase in personal income in 2020, largely due to the CARES Act. Much of that was saved and might fund consumption in 2021. More stimulus is likely forthcoming from the new administration and a Democratic Congress.

The combination of an end to the pandemic, increased personal income/saving/pent up demand, and further stimulus seems to set up a great scenario for stocks this year.

Meanwhile, Treasury yields dropped substantially in 2020 despite massive stimulus (and thus borrowing). The same may not occur this year, but suffice it to say the Treasury market seems to be able to absorb quite a lot of new issuance (see page 3 of this document).

My investments are heavily weighted toward equities, and I am expecting a good year. Perhaps we’ll revisit this in a year and see if I was right!