As a mother of two and a personal finance expert, Rita-Soledad Fernández Paulino understands the difficulty of navigating long-term financial goals while prioritizing your family’s needs today.
That challenge is top of mind for millions of American parents who, like Fernández Paulino, will receive Child Tax Credit payments this year. Under the newly-expanded credit, parents will receive up to $3,600 per eligible child in monthly installments through the rest of 2021, and the other half after filing with the IRS next tax season.
While the credit is designed to help parents cover the costs of raising children — and expanded in response to financial hardship many families faced through the COVID-19 pandemic — there’s no limit or restriction on what individual families may do with the money.
Fernández Paulino, for one, plans to put her credit toward child care costs, while saving money for a future down payment on a home. But it wasn’t long ago that these payments would have been a lifeline for paying necessities and medical bills during a period of unemployment, the creator of Wealth Para Todos and NextAdvisor contributor says.
“Don’t feel guilt or shame for putting that money toward overdue bills, groceries, debt, child care, or other things you see fit,” Fernández Paulino says.
What Parents Should Know About Advance Child Tax Credit Payments
With no real guidance or restrictions on what you can do with the advance Child Tax Credit payments, some parents might wonder how best to use it. And for parents who are earning much more than they did during the year for which they last filed taxes, it might make sense to opt out of the advance payments altogether.
While it can be beneficial to begin saving for your child’s education with a 529 plan or other education-focused accounts, that’s not the only way to use the credit in a way that will set them up for success.
In fact, that may not be the wisest choice if your own finances aren’t already in order.
“Ultimately, your children benefit greatly from you being financially stable,” says Anna N’jie-Konte, CFP and founder of Dare to Dream Financial Planning and a mother of three. Parents’ financial abundance gives kids the gift of not having to worry about their parents’ financial health or retirement security in the future, she says.
N’jie-Konte is incorporating the payments into her family’s regular monthly budget. “We are simply treating the extra funds as we would any other bit of excess cash flow — it just allows us to meet our goals that much faster.”
2021 Child Tax Credit Details
- Expanded credit allows eligible families to claim up to $3,600 per qualifying child under age 6, and $3,000 per qualifying child between 6 and 17.
- You’ll receive half of the full amount you qualify for this year — in six monthly installments through December — and the rest next year when you file your tax return.
- The exact amount you’ll receive will be calculated based on your modified adjusted gross income (AGI) from your latest tax return (2019 or 2020).
- The extra Child Tax Credit begins to phase out for individuals earning more than $75,000 or married couples earning more than $150,000, so if you expect to earn more than that this year, it might make sense to opt out of the advance payments, which could potentially lead to a smaller return — or taxes owed — next tax season.
- You’ll receive your payments either through direct deposit or mailed check.
- The IRS has released a set of tools to help you manage your payments and opt out of advance monthly installments.
How Parents Should Use the Payments
To help you navigate the options that might work best for your family, we talked with some of our favorite personal finance experts who also happen to be parents themselves. Like Fernández Paulino and N’jie-Konte, they explained their own plans for the payments, as well as their recommendations — no matter where you are on your financial journey.
1. Emergency Savings
Start with a solid foundation. Building an emergency fund is a great first step in ensuring your family’s financial stability. “If your family lacks a savings cushion to afford household necessities (like housing, groceries, and insurance) in an emergency, then I’d save the credit. Every penny,” says Farnoosh Torabi, personal finance expert and host of the “So Money” podcast.
With an emergency fund in place, you’ll have peace of mind knowing that your family is prepared for any obstacles the future throws at you — like a costly unexpected expense or income loss. Experts recommend most people have at least six months of expenses in an emergency fund, kept in an easily accessible, low-risk account like a high-yield savings account.
“The goal here is to protect against the risk of unforeseen events that can take away your ability to make money and sustain your family in the meantime,” says Shang Saavedra, personal finance influencer at Save My Cents.
Like N’jie-Konte, Saavedra views using your Child Tax Credit for essentials like an emergency fund as a way to prioritize your family’s collective long-term wellbeing. “I believe in the airplane analogy of putting your own oxygen mask on first before helping your children,” she says.
2. High-Interest Debts
If you have credit card interest piling up, the Child Tax Credit payments can make a big difference.
Especially if you can only afford to make minimum payments toward your credit card balances, leverage the extra cash by applying a portion to your debt, says Dyana King, budget coach and creator of Money. Boss. Mama. “This carries the potential to reduce your debt payoff time and free up money in your budget even after the tax credit payments end.”
One way to accelerate the payoff process is through a balance transfer. Balance transfer cards allow you to transfer existing debt (often for a fee) and pay down the balance while accruing no interest for a set period.
Consider, for example, you have credit card debt totaling $3,000 and you’re eligible for a $300 monthly Child Tax Credit payment between now and the end of the year. If you transfer the $3,000 to a balance transfer card and funnel the full payment toward your balance monthly, you’ll reduce your payment by $1,800 and have just $1,200 left to pay down by the end of the intro period.
If a balance transfer option isn’t right for you, you can also strategize with a debt payoff method:
- Debt avalanche: Prioritize paying off accounts with the highest APR first, and work your way down from there.
- Debt snowball: Make higher payments only on the account with the lowest balance, while paying the minimum on your other accounts. As you pay off one account, roll over those payments to the next highest balance.
- Debt landslide: Focus on paying off the account you most recently opened first — because credit scores value new accounts highly, this can help you maintain your credit throughout the payoff period.
3. Education Savings
If you have financial priorities like an emergency fund and high-interest debts taken care of, another way to use the credit to more directly benefit your child is through a savings or investment account for their education.
“This way you’re giving your children a leg up above and beyond the gift of their parents’ financial stability,” explains N’jie-Konte.
Here are some options to consider:
- 529 College Savings Plan: This type of investment plan is specifically designed for college savings, with earnings that are tax-deferred and tax-free withdrawals for specific educational purposes.
- Roth IRA: A Roth IRA is a tax-advantaged account that allows up to $6,000 in annual contributions. There’s typically a 10% tax penalty on early (non-retirement) withdrawals, but that’s waived for qualified education expenses.
- High-yield savings account (HYSA): You won’t get as much growth over time with a high-yield savings account, but you can earn a bit of extra cash in interest over time. This may be the safest option for a child that’s approaching college age, since these accounts have no exposure to market volatility.
4. Family Budget
As a parent, everything from field trips and lunch money to fueling up the gas tank can quickly eat up what you have in your bank account. Perhaps the simplest way to use the extra payments you’ll get via the Child Tax Credit is by treating it as additional cash flow to build into your monthly budget.
The payments are being sent on an established, regular monthly schedule, and planning for those dates ahead of time can help you plan your finances accordingly, says Bola Sokunbi, founder of Clever Girl Finance and author of Clever Girl Finance: The Side Hustle Guide.
This way, you can plan for necessities first, rather than seeing it as surplus cash — which can lead to spontaneous spending (or overspending).
“I think my biggest recommendation for parents who are receiving this credit and don’t have an immediate need for it would be to have an idea on how to use the funds,” says Zhi Li, CFP and owner of Twelve Two Capital. “Otherwise, windfalls like these Child Tax Credit payments can lead to quick spending on things that don’t really provide the value that they were intended to.”
Another thing to consider — there’s no guarantee that the expanded credit and advance payments will continue past 2021. While parents may still qualify for a tax credit in the future (the previous version of the credit granted up to $2,000 per eligible child), there’s been no action from lawmakers to make the expanded credit permanent. Just like last year’s stimulus payments or an annual bonus at work, you don’t want to make your future financial goals dependent on any windfall.
5. Future Expenses or Experiences
If you have your financial health and priorities in order, there’s also nothing wrong with planning ahead or even having a bit of fun with the extra Child Tax Credit money. Take advantage of the opportunity to fund impactful experiences for your kids or put money toward their future expenses.
“My family is using the Child Tax Credit to help us pay for about 22 hours of child care,” Fernández Paulino says. In turn, that’ll help her family dedicate more money toward a down payment for a house.
Like Fernández Paulino, consider ways in which you might reallocate your budget using the credit so you can dedicate more money elsewhere — whether that means shoring up a retirement fund, opening a brokerage account, saving for a wedding, or other long-term goals.
You might also consider investing in a meaningful experience for your children, Li says. “It could be a family trip, or camp, or an enrichment program.”
It may not seem as sensible an investment as a dedicated savings fund or 529 account, but these experiences can be very powerful, he says, and help stimulate curiosity, exploration, and learning for any child.
Your options for spending the Child Tax Credit payments extend beyond education funds and daily necessities. If you have your emergency fund and other financial basics covered, investing this money in a retirement fund for yourself — or even your child — can be a good long-term move.
Take Mahlet Amaha, investing coach and the creator of ‘Black Womxn Are Wealthy‘, for example: she’s set up her 2-year-old son to be a multimillionaire by the time he hits the age of retirement. As she explained in a recent NextAdvisor column, she plans to use the money she receives from the Child Tax Credit each year to invest in a low-cost index fund for her son. By investing $2,000 a year, her total contribution will reach $36,000 — and by the time he’s 65, with a 10% yearly growth rate, he should be left with an $8.8 million retirement fund.
Saving can only take you so far; investing your money and allowing compound growth to work its magic is the key, Amaha says. “I want to take that idea of investing even further by bringing our children into the mix,” she says. There is a significant advantage to investing early in life; that extra time can translate to transformative growth for your money. Using this compound growth calculator, you can get an estimate for your own situation.
Even investing a small amount now can mean a more stable financial future for your child(ren), says Amaha. “I believe that we can all create generational wealth and set up our children to enjoy the security and stability that comes with building wealth. And we can do all this without spending a dime of our own money.”