The 15th Of The Month
Get up, get up, get up, it’s the 15th of the month. That is my tribute to Bone Thugs-N-Harmony. Sorry, I couldn’t resist, and if you are like me that song will now be in your head for a week or so! So why am I quoting a rap song from the 1990s? Because this week marked the start of the enhanced child tax credits put into place by the Biden administration. Starting on July 15th, most families will start receiving money via direct deposit or checks in the mail from the federal government. The amount you receive will depend on the number of kids you have and the age of each. The real question now is what to do with your child’s tax credit?
The child tax credit is not a new thing. In recent years, the max child tax credit was $2000 per child. Under this new plan, the max per child is now $3000 for kids under the age of 6 and $3600 for kids over the age of six. In the past, families would claim this credit on their tax returns. Under this new plan, half of this credit will be paid via direct payments between July and December 2021. The other half will be claimed on tax returns as was done in the past. There are some income limits and tapering to this enhanced credit. If you want to calculate your expected payment, use this calculator. If you qualify for the full amount, your monthly checks will be $250/$300 per child, depending on the age of your children.
I Got My Money, Now What?
I am writing this post the day after I received my first payment. My wife and I do not qualify for the full amount but we still received a few hundred dollars. That got me thinking, what should we do with the money? So I made a quick list of some options and decided to share them here. There is certainly no one right answer to this question. And I am sure I will miss some that other people will think of. If you have one that I don’t list, please share it in the comments below. Thanks!
This goes against my normal advice and my instincts. But, I put this first for a reason. The whole purpose of the increased credit and advanced payments is to stimulate the economy. After a year of economic shutdowns and chaos, our economy needs all of the help it can get. Putting the money back into the system will get people back to work, keep businesses open, and ultimately help people rebound from 2020. Spending money is what drives our economy.
Additionally, spending money can feel good. If your debts are under control and you are in a comfortable space with your personal finances, go ahead and splurge. If you are receiving this money, it is because you have children. Maybe do something as a family or spend it directly on something they want or need. If you are in a position where this is “extra” money, enjoy it!
Pay Down Debt
If the above section does not appeal or apply to you, my next piece of advice would be to pay down your debt. Specifically any high-interest debt. Credit card debt, car loans, and student loans are where I would start. Debt restricts your money flexibility and freedom. The less debt you have, the more choice you get with what to do with your money. For many, this amount of money could eliminate or significantly reduce debt. In the long run, this will save you a lot of money on interest, reduce stress, and restore choice. Paying down debt should always be a priority. This is a good place to direct your child tax credit if you choose not to spend it.
Build Up Your Emergency Fund
The Covid-19 Pandemic taught us many lessons. One of those lessons is the importance of a well-funded emergency fund. If you search the internet, you will find a lot of opinions on this. Keeping a store of cash can be controversial. Money that is not invested in some way will lag inflation over time and lose value. Because of that, some people will use vehicles like a Roth IRA, HELOC, or Credit Cards as their emergency fund. This post isn’t about that, but for me, having cash in a high-interest savings account gives me the peace of mind I need. That peace of mind is a trade-off for the loss of growth, and I am OK with that.
How much is enough? The traditional answer has always been 3-6 months of essential living expenses. After 2020, I would suggest 9-12 months. I am currently in the process of boosting my emergency fund to at least 9 months and possibly 12. If you are like me, then using your child tax credit to boost your emergency fund may be the way you want to go.
If you follow our podcast or this blog, you are probably surprised to see this listed last. So am I, actually. In this particular case, investing the money will do the least amount to help the current state of many American families. If all of the above are taken care of, then investing your child tax credit is absolutely a great idea!
There are a few ways you can do this. Here are a few:
- Fund you and your spouse’s Roth IRA ($6,000 per year for each)
- Contribute to your children’s 529’s (Especially for the kids under the age of 6. They have time to compound. Up to $15,000 with no gift tax)
- Start a new custodial brokerage account for each child and fund them equally (no limit)
- If you do all of the above already, then put the money in your own brokerage account (no limit)
If you have any questions about the accounts, I just listed, check out our Beginner’s Guide To Investing. As always, I strongly recommend investing in low-cost index funds or ETF’s that track the entirety of the United States stock market or the S&P 500.
For example, if you have two kids under the age of 6 (let’s say 2 and 5), you will receive $3600 ($1800 for each) in direct payments between now and December 2021. If you take that $3600 and put it into a low-cost S&P 500 Index Fund and leave it there, it has to potential to be worth $118,755 for the 5-year-old and $141,439 for the 2-year-old when they both turn 65. That assumes an average 6% market return (very conservative and factoring in inflation) and no further contributions. The power of compounding at work again!
What Will You Do?
As I mentioned, there is no right answer. Personal finance is personal, and you have to start where you are. The order listed above is what I think is optimal for my family. Each of you has to assess where you are at and what best to do with the money. The only thing I strongly recommend is that you make an intentional choice so that this potential opportunity is not lost.
Would you please leave some of your ideas or what you plan to do with your child tax credit in the comments below?