The IRS has now confirmed that the ARPA legislated advanceable child tax credit (CTC) will start paying out from mid-July, until the end of the year (see full schedule). For many parents this will be a big boon as the extra money – $250 to $300 p/month depending on age – will go a long way to covering the many child care related costs families face today, particularly in a post pandemic economy.
But if you don’t need the money to meet the most basic of needs like food and clothing, here are 5 things you should consider doing with this money for the longer term betterment of your child dependents:
1. Build an Emergency Fund
Create or add it to an emergency fund that gives you three to six months of cushion if you or your spouse lose your job(s) or runs into a financial emergency. Who knows when the next pandemic like situation hits or you need some extra money until the next paycheck. So having this money in reserve can be very helpful from both a practical and peace of mind perspective.
But rather than leave your emergency funds in your checking account put it into a good high yield savings account or money market fund that preserves the capital no matter what happens and gives you a better return than your average checking account.
2. Contribute to a 529 plan
If you are serious about your child’s long term education and want to be prepared for the rising cost of education, then do your self a favor and open a tax advantaged 529 account. This type of account allows you to save pre-state tax for college and pay tax-free for any eligible education expenses for your dependents. Best of all the money in these accounts grows tax free so even small contributions now will become much larger over time thanks to the power of compounding.
3. Pay Down High Interest Debt
Over the next 6 months (in 2020) the expanded CTC payments could be worth up to $1800 for many families. If you include the 2022 portion of $1800, the total becomes $3600. This is nearly a third of the average credit card debt. So by using some of these funds to pay down high interest (bad) debt you help your immediate and long term financial constraints.
4. Extra Tutoring
For many families virtual schooling has not worked. Either the home environment wasn’t conducive to this or your child dependents (particularly those under 10) struggled to learn effectively over virtual classroom sessions. So to try and get your children back on track or even ahead of others consider spending some of the CTC payments for extra in-person tutoring at one of the many learning centers that are fully reopening now.
Lots have some great deals and you can negotiate with them as they are keen to grow their business following a tough 2020.
5. Splurge a Little For Your Family’s Mental Wellbeing
While this is is not necessarily going to directly improve your financial health, it could be very important for your families’ mental health, which over the longer term could almost be as important after a rough year. While vacations have become more expensive as vaccinated Americans get more comfortable traveling, you can still get good deals locally or in smaller cities (see some options here).
I am sure there are more options than the above in using your CTC funds wisely and every family has different constraints that could limit the feasibility of the suggested ideas. But planning ahead on how to use the extra money will maximize the utility of this payment.
Families will claim the rest of the credit when they file their 2021 taxes in 2022 – but I would recommend use the second half lump sum and following the same approach you take for the monthly payments in 2021. Leave a comment below on how you plan to use the expanded CTC funds for the betterment of your family.