Millions of parents will be receiving advance monthly payments of the child tax credit through the end of the year. Eligible families will receive $300 per child aged 5 or younger and $250 per child aged 6 – 17. How the money is spent is completely up to you. So, what’s the best way to use the extra cash? Keep reading for our suggestions.
Cover your immediate needs
If you’re currently behind on your bills or having a hard time putting food on the table, the best thing to do is cover your immediate needs. Review your budget to see where you’re coming up short and put the money towards those things. This may also be a good time to see what expenses you can eliminate from your budget (i.e. unused subscriptions, gym memberships, cable) to give yourself more breathing room.
Make payments towards your credit card debt
Getting into debt is easy, digging yourself out is a whole different story. If you’ve only been making the minimum payments on your credit card debt, use the extra cash to help stop the bleeding. There are two popular ways to pay off debt; the debt avalanche method and the debt snowball method. In both cases you’ll make minimum payments on all your cards while putting most of your funds towards one specific card. With the avalanche method, your main focus will be paying off your card that has the highest interest rate. Once that’s out of the way, you’ll move on to the card with the next highest interest rate and continue until you’re debt free. With the snowball method, you’ll pay off the smallest balance first and work your way up to your highest balance until it’s all paid off.
Build your emergency fund
You may feel like you’re in a good place right now, but anything can happen to anyone. So, you need to be financially prepared. Having a cushion in the bank will prevent you from having to rely on credit cards or take out a loan if you lose your job, have a surprise repair bill or your child needs medical treatment. Unfortunately, a quarter of Americans have no money saved at all. If you fall into that group, use your child tax credit to start building your emergency fund today. From there, you can work your way to having the six months of living expenses that experts recommend.
Open a custodial account for your kids
Start saving for your child’s future by opening a custodial account. You’ll be responsible for all the transactions until the child is 18 or 21, depending on where you live. But once they get of age, they can take over the account and use the money to pay for college, put a down payment on a house or reach some other financial goal. To boost their savings, you can also deposit any birthday and Christmas money they receive.
Put it in a 529 savings plan
A 529 is a tax advantaged plan that lets you save for education expenses. You can use the money to pay for college, K-12 tuition, apprentice programs and student loan repayments. Your earnings grow tax-free, and you won’t pay any taxes if the money is withdrawn for qualifying expenses such as tuition, books and room and board. However, if the money is used for something else, you’ll face a 10% penalty. If your child decides not to go to college, the funds can be transferred to another family member.