Last week, the first of six monthly Advance child tax credit payments went out to millions of parents across America.
Depending on income, families will receive six monthly payments of $300 per child for children under six and $250 for children between six and 16. Qualifying parents receive the payments automatically. And unless your family’s finances dramatically change between now and tax filing season, it won’t entail a future tax liability. In fact, the advance is half of the $3,600 per child for children under six and $3,000 for children six to 16 qualifying taxpayers can claim on their 2021 taxes.
The payments are a small help for American families still reeling from the pandemic. No one would blame cash-strapped, chronically worried parents if they blew the whole wad in a single Target run. But what do financial advisors suggest doing with the money? Their advice ranged from tax advantaged saving plans to holistic considerations of family budgets.
1. Get Serious About a Family Budget
To be in good financial health, one of the most important things to do is to pay attention to how your money moves. Understanding how you’re spending today can help show you how to spend more wisely tomorrow. Yes, this is Finance 101. But it should be reiterated. Ksenia Yudina, founder and CEO of family-oriented saving app UNest, recommends following the 50/30/20 rule. If you’re unfamiliar, this means 50 percent of your income goes toward necessities (i.e. rent, mortgage, food, etc.), 30 toward your wants, and 20 toward high-income debt, savings, and investing if you already have an emergency fund that can cover 6+ months worth of living expense.
2. Fuel an Emergency Fund
Yes, it’s hard to save money. Especially when you have kids. But a storehouse of cash makes life much easier. Emergencies become less urgent. Yudina advises parents to focus on paying down high interest debt, then building a $1,000 emergency fund and trying to grow your nest egg from there. “Make sure to have three to six months (or more) of your living expenses in a rainy day fund,” Yudina says, adding: “Once you have an emergency fund, you have more flexibility in how you allocate the extra money.”
3. Open or Fund a Roth IRA
It might seem selfish for parents to use the credit for their own retirement accounts. But California financial advisor James Walsh urges parents to place the advance credit money in Roth IRAs. Unlike traditional IRAs, which are tax deductible while people pay into them and taxed when withdrawn during retirement, income earned in Roth IRAs get taxed immediately, instead of at withdrawal.
“This is huge because many parents will be in a higher tax bracket decades from now,” Walsh says. If your income dipped this year or you believe it will rise over time, your Roth IRA will be taxed at a lower rate than when your future self levels up to a higher tax bracket. “I have to stop many of my older clients from kicking themselves once they realize that they should have started a Roth IRA when they were younger,” Walsh says. And it’s not completely selfish, in all honesty: when your kids are grown you’ll be a rich grandpa instead of a broke old guy burdening their lives.
4. Stash it in an Education Savings Plan
It’s hard for parents to set aside money for college instead of putting their money towards more urgent, immediate needs. But as Ohio financial planner and father of four John Bovard notes, 529 plans are more flexible than many parents suspect. The popular tax-advantaged savings plans are associated with higher education but can be spent more than just college and grad school. “A lot of my clients send their kids to private or Catholic grade school and high schools,” Bovard says. “The way 529 plans are set up, they can be used to pay up to $10,000 towards K-12 grades education.”
5. Use (Some of it) for Family Fun
This suggestion — using the money in a way your family will enjoy — comes with more caveats than the others here. You should prioritize paying debts, building up savings, and investing for the future over it. But considering that your kids will grow up before you know it, Michael Foguth, founder of Foguth Financial Group in Michigan, says parents who can afford it should consider using some of the extra dough to make some memories. “If your budget supports it, use the funds to have some fun with your children,” Foguth says. “Take a weekend vacation or upgrade your outdoor play equipment.”
6. Reward Yourself for Doing the Right Thing
Using money wisely is difficult. The rewards are deferred for the future, which often leaves your present day-to-day life feeling unrewarding. Tara Unverzagt, a certified financial planner with South Bay Financial Partners in Torrance, California says if you’re doing the right thing overall, it’s okay to set a little money aside for yourself. “If you are working really hard to pay down debt, save for a house, kids’ college expenses, or some other goal and you’ve been depriving yourself to cover those expenses and intentions, I do recommend using maybe up to 10% for a treat to congratulate yourself for doing a great job managing your money.”
7. Double Check Your Life and Disability Insurance
Megan Kopka, a North Carolina financial advisor specializing in advising families of children with disabilities, says parents should use the extra income to shore up their life and disability insurance. Writing those checks may feel excessively cautious — or even pointless — in the short term. But if something unexpected knocks you out of the workplace in the future, the financial security from a good insurance coverage can help keep an emergency from becoming a disaster. “This is income protection,” Kopka says. “When you are a young person, especially a young parent, your greatest asset is your ability to earn income.”