Child Tax Credit—Here’s What to Do with the Extra Cash

by Kaitlyn Ranze

It’s official. More cash is coming down the pipeline to give parents some financial relief. To be specific, the American Rescue Plan passed earlier this year increases the existing maximum child tax credit to $3,600 for children under 6 and $3,000 per kid for children between 6 and 17. 

According to the feds, roughly 39 million households will begin receiving checks next month, “without any further action required.” Parents accepting the CTC payments can expect to receive (through direct deposit, paper check, or debit cards) $250 monthly payments or $300 monthly payments over the next six months.

How can you make the most of this extra cash? We’ll talk about why you may not have made the best financial moves in the past and what you can do to increase your financial well-being starting with the child tax credit.

Why you may have missed this opportunity to do more with your windfall in the past.

Mental accounting is the tendency we sometimes have to treat money differently depending on where it came from or what we intend to do with it.

It’s the reason lottery winners go broke and 80% of professional athletes deplete their income before their official retirement.

From a more normal human perspective: it’s why we are more likely to blow a bonus or the cash from a generous birthday card. In this case, mental accounting may undercut your financial progress by treating your child tax credit as more “spendable” than other income (like your regular paycheck).

We’re not doing that this time.

Here are 7 smart ways to manage the money from your child tax credit.

1) Put your funds aside temporarily. 

Transfer the money into a relatively safe short-term account (high yield savings or money market account) while you determine the next step in managing the money.

Why put it aside? Having the funds in a different account than your daily spending serves as a nudge to not use them.

Sitting on the money can clear your head of spending it and will give you time you need to develop a strategy.

Pro Tip: Create an Auto-Save inside the nav.it app. Your savings is available for withdrawal at any time, and you can save for as many goals as you want!

2) Evaluate YOUR circumstances.

Many Americans need this money just to make ends meet. And that’s ok. That’s why you’re receiving these funds. 

Prioritize your food, shelter, transportation, and communication. 

In the words of our friend Kenneth, “This may not be what you want to hear, but THIS is exactly when you want to start looking at your money differently. When things are tight, budgeting is how you claw your way out and get back on solid ground. So, even when you don’t have money, you need to budget.

We created a FREE downloadable Guide to Budgeting, but if you don’t want to spend a bunch of time (that’s limited) on designing a budget from scratch, we got you. The Nav.it Money App has a budgeting feature baked right in.

Once you’ve downloaded the app from the Google Play Store or Apple Store and connected your account, simply select the “Money” tab. Then select the “Details” button next to Budget. Here you’ll be able to categorize your transactions by clicking each budget line.  

Once you know where you are, it’s easier to create a plan for where you’re headed. 

3) Do you have an emergency fund?

According to Bankrate study, 28% of Americans had absolutely nothing in their emergency fund PRIOR to the pandemic. Which makes receiving the child tax credit the perfect time to start one.

During a recession, you may not know where your next dollar is coming from. Make the minimum payments on your consumer debt and put your money in savings. In the words of nav.it’s founder Erin Papworth, “You never know when that emergency fund could save your a$$.” Check out this Downloadable Guide to Emergency Funds.

Once you have six months (or more) saved, then consider paying down some debt. 

4) Do you have consumer debt?

With all the market buzz, it’s tempting to invest in stocks or crypto. But, it’s rare that the return on investment will outweigh the cost of compound interest on high-interest debt like credit cards. Make your child tax credit check work for you by paying down your high-interest debt.

How to tackle your debts?

Start by outlining every single outstanding debt you owe. If you’re not snowballing your payments or using the avalanche method with your debt repayments, what strategy are you using?

Need a little guidance? Don’t worry. The nav.it money app has money coaches to help you decide the right option for you.

5) Are you invested for the future?

According to the National Institute on Retirement Security, almost 40 million households have no retirement savings at all. 

But let’s say you invest a portion of your tax credit (the initial $1,800 in payments) in an S&P 500 index fund, and its annual rate of return is 10%. Without any additional contributions, your child tax credit could grow to around $31,408 after 30 years.

Long-term investing is all about growing your wealth over time.

6) Are you crafting your financial legacy?

Legacy planning is a financial strategy that prepares people to pass their assets to a loved one. If you can leave behind an inheritance to your descendants, that constitutes a legacy. 

One of the simplest ways of doing this is by establishing a 529 plan for your kids. This account offers tax-free growth and withdrawals for college, and some contributions may be tax-deductible.

Million Dollar Baby

For something a little more fun, invest $2,545 into the S&P 500 when your child is born (or as soon as possible after). Assuming a 10% annual rate of return, your child will have $1,001,514 by the time they turn sixty.

7) Most importantly, live your values.

It’s been a long year. You’ve had time to consider what is important in your life. Whether it’s building wealth, giving to others, or something more personal, spending money is an expression of your values. 

Now’s the perfect time to get really expressive and intentional, making the tax credit money work for you.

Have you dreamed of being the new Doris Duke with your own charitable fund? Then give some or all of your child tax credit check away! (And take advantage of the tax breaks for charitable donations). Start locally and search for a way to make an impact in your community. Your gift may be something tangible that you can feel up close. 

Have you made a list of home improvement or remodeling goals while cooped up at home?  Or have you dreamed of destinations and travel? You can turn your child tax credit check into the foundation of your personal travel fund or home remodel budget.

Creating an Auto-Save is a great way to tackle your financial goals.
Auto-Saves are celebrated in nav.it’s community feed. You can choose to keep your savings goal private or publish it so it gets the love it deserves.

Or plan cool activities with friends and family (how about skydiving your way back to normal life)!

Wealth isn’t just about the amount in your bank account. It’s personal and experiential. Even if you have a little debt or a too-small emergency fund, take a moment to do one fun thing. The most important part is that you made this windfall  work for you.

Related Reads:

Downloadable Guide to Emergency Funds

Downloadable Guide to Budgeting

More Stories
Managing Money and Mental Wellness
%d bloggers like this: