After several weeks of political debate and wrangling, the United States Congress passed the American Rescue Plan of 2021, a law enacted for the purpose of providing sufficient stimulus for the national economy to recover in the wake of the coronavirus pandemic. Among the various aspects of the ARP, one of the most talked-about is the individual stimulus checks that qualified individuals are eligible to receive.
Receiving Needed Financial Support
Most working Americans who earn less than $75,000 on an annual basis are eligible to receive a $1,400 stimulus check; this amount could be worth more for heads of household whose adjusted gross income is less than $150,000 per year. More Americans will actually be able to get these payments in 2021 because many of the issues that plagued the delivery of checks during the Trump administration have been eliminated.
While $1,400 may not exactly be a windfall, it will certainly help many Americans in terms of putting at least some money in their pockets. For those who have already returned to work and have been able to stabilize their finances, the stimulus payment could be considered to be a nice extra, and it could be used to get started in the world of compound interest investing. If you already manage a compounding portfolio, the $1,400 could be deposited therein as an extraordinary contribution; however, according to billionaire investor Warren Buffett, there is an even better use for this cash.
Invest for the Future by Eliminating Debt
Various financial news publications have asked Buffett about what he thinks would make the most sense for someone getting this stimulus check without having an immediate need to pay for household expenses. Buffett did not think twice before explaining that the money should go towards paying off debt, particularly credit cards with higher rates of interest. The founder and former CEO of Berkshire Hathaway has always been unequivocal about his stance on debt; he firmly believes that anyone who carries a high balance at 18%, for example, will not be able to financially come out ahead until that debt is satisfied.
There is a lot of truth in Buffett’s advice, and it is strongly related to compound interest. In 2021, it is difficult to find a high-yield savings account that compounds 1.2% interest on a daily basis. On the other hand, credit card debt that compounds 12% interest against you on a daily basis is quite easy to come across. Unless you are able to make high contributions to your compounding portfolio, the 12% debt will keep dragging you down.