Most people spent CARES act funds on needs, not wants

A new study suggests last year's Economic Impact Payments provided essential support.

What do you do when you receive money you weren't expecting?

Most people spend it.

In financial planning, it's called a "current income windfall," and many Americans got one last year through the Coronavirus Aid, Relief and Economic Security (CARES) Act's Economic Impact Payments (EIPs). Previous research suggests that when people have a current income windfall, they tend to spend it, rather than using it for financial transactions, like saving it, investing it or using it to reduce debt.

That's what researchers from Texas Tech University's Department of Personal Financial Planning expected to find when they began an analysis of how Americans used their EIPs. While most people spent their payment, in a study published Wednesday (Jan. 6) in Financial Planning Review's COVID-19 special issue, researchers found nearly two-thirds of respondents used at least some portion for those financial transactions.

Most people (83%) allocated at least some portion of their EIP toward spending needs, whereas less (65%) used some portion for financial transactions. However, an even smaller portion of the sample (55%) used at least some of their EIP for spending wants. When comparing how participants used the majority of their EIP, 6% spent most or all on spending wants, while about four times as many used most or all on financial transactions (24%), and about eight times as many respondents spent most or all on spending needs (48%).

Housing and food were common areas for both want- and need-based spending. Want-based spending also trended toward hobby and recreation expenses.

"The results suggest the EIPs provided essential support that helped people meet their spending needs in fundamental areas—e.g., housing and food—and improve or stabilize their financial situation," said lead author Sarah Asebedo, an assistant professor of personal financial planning and director of the Life-Centered Financial Planning Graduate Certificate. "The EIPs provided much needed support to those experiencing job instability with less financial resources and more people to care for, in addition to those who experienced a job change during the pandemic, because these individuals generally allocated a greater proportion of their payment to their needs and less to their wants or financial transactions."

Along with co-authors Yi Liu, a recent doctoral graduate, and current doctoral students Blake Gray and Taufiq Hasan Quadria, Asebedo said several surprising results emerged from their analysis.

"Masks and distancing preferences consistently predicted EIP spending in areas that typically involve some level of human interaction or social outreach," Asebedo said. "Those who were in favor of following the Centers for Disease Control and Prevention's mask and distancing guidelines—compared to those not in favor—spent less on transportation, travel, donations, education and hobby and recreation. These spending areas also are generally in sectors that have struggled amidst the pandemic.

"A curious result was that older individuals—a greater health-risk population—allocated more of their EIP to transportation wants, despite the possible increase in health risk inherent in transportation-related activities."

Researchers also noted that increased spending was significantly related to expectations of a faster economic recovery, optimism about avoiding a recession and more certainty about near-term stock market performance.

"These combined results suggest that if the goal of a stimulus payment program is to stimulate the economy with enhanced consumer spending in the short run, mere injection of money may not be enough," Asebedo said. "EIPs accompanied by assurances of an economic recovery and future stability may increase consumer confidence and boost immediate economic growth through increased consumer spending."

The results were obtained by surveying 1,172 respondents using Amazon's MTurk platform, therefore it is not nationally representative of all Americans who received an EIP under the CARES Act.