Personal Finance Nov 17, 2020 06:07 PM EST

How Next Round of Stimulus Checks May Help Paycheck-to-Paycheck Families

By Madz D.

Another coronavirus stimulus bill is being urged by the President-elect Joe Biden, as soon as possible. According to Motley Fool, for many lawmakers, stimulus money is crucial in helping bolster the economy and aid Americans through the coronavirus crisis.

How the Next Round of Stimulus Checks May Help Paycheck-to-Paycheck Families
(Photo : @jinyun/Unsplash)
How the Next Round of Stimulus Checks May Help Paycheck-to-Paycheck Families

Data from the  National Bureau of Economic Research (NBER) shows some insight into the second stimulus check issue.

Families living paycheck-to-paycheck are the only group that may get the most long-term benefit from the stimulus checks. At the same time, direct payments likely helped many Americans during the crisis. 

How the coronavirus stimulus check could help 

Around 31% of Americans used the COVID-19 stimulus money and made it available by the CARES Act to repay debt, according to the NBER data.

The research revealed that "liquidity-constrained" families were likely to be among this group that put payment toward their debt obligations. 

Liquidity-constrained families are those who are not able to pay unexpected bills that equal to their monthly income.

These families have little to no savings and live paycheck to paycheck. When people without savings get an influx of cash, including the COVID-19 payments, they tend to spend the money, many economists assumed. 

However, the data shows this didn't happen, and instead, many used it to pay their creditors. 

Motley Fool says that the good news is the decision could make a significant difference in the long-term financial stability if those who used the COVID-19 money in reducing their debt, specifically those who wouldn't have a large lump sum. 

Read also: Without Stimulus Money, These Essential Programs Will Evaporate

It's because those who had a partial payment of their debt with their checks reduced the total interest costs they should owe over time by reducing the primary balance. Meaning, they will keep more money in their pockets and could use it for other financial goals. 

All of the original purchases become more expensive and make future income to repay past purchases if they pay interest to a creditor. Both of these consequences make it hard to get ahead financially. 

If the COVID-19 check were enough to pay off a debt or make that happen sooner fully, paycheck-to-paycheck families would have one less monthly obligation.

It would eat up much of their income and leave them with too little to save. It may be easier for those families to build an emergency fund and avoid debt in the future or accomplish other financial goals if they have no obligation. 

More stimulus money is needed

The stimulus check may have a long-term positive effect on paycheck-to-paycheck families as they could help them get closer to debt freedom. However, millions of people need more COVID-19 stimulus money in their bank accounts to shore up their financial status. 

While unemployment is near record highs, COVID-19 cases spike again, and governments impose further restrictions. Lawmakers should provide financial relief to Americans who need to get through this crisis; especially, many people made smart choices of how they spent their first stimulus check. 

Read also: COVID-19 Super-Spreader Linked to Restaurants, Hotels, Gyms

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