Now that we are in the month of September, there have been three payments delivered by the IRS for the Child Tax Credit.
The Child Tax Credit is an advanced payment of $300/child ($250 for children ages 6 to 17) that is paid around the 15th of every month from July to December 2021. For those that are eligible for them, this can total to receiving up to $1,800 per child in 2021 with the rest being paid when you file your 2021 income tax return.
Since receiving these funds is due to having children, many think that the funds should be used solely for their children’s savings. This is a great idea if all of your important financial goals are taken care of, but if they aren’t, then it’s important to use the funds to help you get on track financially. Expenses tend to be higher when you have children, so you can think of these as additional funds that are being sent to help you out in managing those increased expenses.
By using the Tax Credit funds to proactively improve your family’s financial health, you can provide benefits to your children, because:
- Making good financial decisions sets a great example for your children that will guide them to do the same in adulthood
- You may feel less stress about money which will allow you to be more present with your children
- If you are paying less in debt, this can provide you more freedom to spend money on experiences for your family
- By taking care of your savings and debt now, you will decrease the chances of becoming a burden on your children once you are older and unable to work
We recommend using your Child Tax Credit funds to:
Build up an emergency fund
Every household should have a minimum of one-month of expenses saved for emergencies. This may feel counterintuitive if you have high interest debt, however, focusing on your emergency fund is truly the key to getting out of debt. If anything were to happen, we want to make sure that you can cover it with savings rather than continuing to go further into debt. This is the key to breaking the debt cycle.
The reasons why you would need to use money in an emergency fund are in case you experience job loss, medical expenses, home repairs, car repairs, or bereavement like needing to travel for a funeral.
It’s best to keep these funds in a savings account separate from the bank that you have your checking account with. This will keep your savings out of sight and out of mind resisting the temptation for you to easily transfer the funds into your checking account when you want them. There are many online banks that allow you to open up a savings account for free and will provide a higher yield than most brick and mortar banks.
Pay down high interest debt
If you already have one-month of expenses in savings, then it’s time to focus on paying down your high interest debt, which will help you save on interest that you’re paying.
The fastest way to pay down debt is called the avalanche method which is focusing on paying off the debt with the highest interest rate. You can use this method by making your minimum payments for all of your debts, while aggressively paying more than the minimum payment for your debt with the highest interest rate.
Another option is to pay off a smaller debt balance completely with the additional funds. This gives you a quick win, and once you do this, you can go back to focusing on your highest interest rate debt.