If you’re a parent, you’re probably aware of the expanded child tax credit, in which taxpaying moms and dads receive advance payments of up to $300 per child under age 6 and up to $250 per child between the ages of 6 and 17.
The money, which started coming to parents in July, has been making its way to households through direct deposit or the mail. Parents can expect the child tax credit revenue to land in their bank accounts or mailboxes around mid-month through the rest of the year.
You could opt out — in order to receive the money in one lump sum next year when you file taxes — but assuming you aren’t taking that route, you may be wondering about the best way to spend or save the monthly child tax credit payments. Here are some ideas:
— Buy essentials.
— Cover secondary needs.
— Build your emergency fund.
— Repay debts.
— Analyze your yearly spending.
— Do some of all of the above.
If you are struggling with bills, or if you barely have enough food in the house, that’s obviously what you should spend the money on. That’s why the federal government is sending you this money in the first place. The pandemic has battered a lot of households. So if you’re struggling with finances, this money is a lifeline. If you’re using the money to make sure the electric bill is paid or that your kids get a square meal three times a day, you should spend the money on that and feel good about it.
Cover Secondary Needs
Consider funding expenses you’ve put on the back burner. “Secondary needs are essentials that come after you fulfill your necessities,” says Chance Robinson, president of Strong Point Financial and author of “Financial Myths: Important Information You May Not Know About Your Retirement and Financial Future.”
“You may have a dentist’s appointment on standby due to limited funds, a car that had to be repaired or some other necessity that couldn’t be completed due to lack of money,” Robinson says.
So if that’s your situation, this money could be perfect for that. Of course, your kids may not see a visit to the dentist as the best use of the funds.
If you aren’t in a financial jam, don’t spend the money right away. Instead, come up with a plan. Think about how you would spend the money if it arrived in one lump sum, suggests Siyu Wang, a behavioral economist with the Institute for the Study of Economic Growth at Wichita State University.
“Most behavioral economists would agree that without careful and thorough planning, most people regard a large sum differently than if we received the same amount of money in smaller increments over time,” Wang says. “Imagine you could choose between either receiving your monthly $300 child tax credit payment or a $3,600 lump sum at the end of the tax year. Which one would you choose?”
It’s a good question, and it might get you thinking about how to spend the money and whether you could save the money every month for a while — and then put it toward one big thing or goal, like college expenses.
[Read: How to Save Money for Your Kids.]
Build Your Emergency Fund
If you don’t have extra cash put away, prepare for the unexpected by starting an emergency fund.
“In such a time of uncertainty, it is not a bad idea to save a little extra for a rainy day. There is uncertainty regarding jobs, health and much more,” Robinson says. “If the family is doing well to fulfill their basic needs, it is advised to save at least three to six months for an emergency. The child tax credit money is an excellent opportunity to plan for any inconvenience for families in this pandemic.”
This one is pretty self-explanatory: If you pay down debt, especially high-interest loans, you’ll have more money to spend on your kids and your household later.
If you consider the child tax credit extra money, the best use of it is investing, says Bing Yu, professor of finance at Meredith College in Raleigh, North Carolina.
But Yu makes it clear that investing is only a good idea if the cash is truly extra. “In particular, put the money in someone’s 401(k) plan,” Yu advises. “Doing so will generate three benefits: the employer’s matched investment in the 401(k), tax-saving and investment return.”
You could also invest the money directly into your child’s education by putting it in a 529 college savings plan.
Analyze Your Yearly Spending
Are there certain times of the year that are particularly rough? Are you always broke during the holidays, for example, or often put your summer family vacation on credit cards that you don’t pay off for months? You could save the child tax credit payments to use during the holidays or next summer to help make those rough parts of the year a little less rough.
Do Some of All of the Above
Keep in mind that you’ll be receiving child tax credit payments through the rest of the year. The last payment comes in December. So maybe you like the ideas of starting a college fund and paying down some debt and taking care of some secondary essentials. Maybe you can do a bit of all of that.
The main thing is to come up with a plan and stick to it. Because unless Congress changes how the law is constructed, parents won’t be receiving a monthly child tax credit payment every month in 2022. So this could be one of those rare stretches of time where your household has a little more money than usual. If so, you’ll want to make the most of it.
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