The child tax credit (CTC) has given parents a much-needed financial cushion. It has provided 35 million families with up to $300 per month for each child under 6 (and up to $250 for kiddos 6 to 17).
So what’s the best way to use your CTC money? It depends on your financial situation but socking it away in your savings account may be your best bet. Still, an analysis by the Financial Health Network found that liquid account balances on the whole have been largely unchanged since the CTC payments began. Meanwhile, one in four families have leaned on this money to cover childcare costs, according to government data. Roughly 40% have used it to pay down debt.
Here are some ways you might use it to boost your cash reserves.
Put some (or all) of it into your savings.
The general rule of thumb is to save three to six months’ worth of expenses in a savings account that you can easily access. It’s called an emergency fund — and it’s exactly what it sounds like. Think of it as a safety net that will be there to catch you the next time you’re face to face with an unexpected bill. Instead of using a credit card or borrowing money, you’ll already have that cash waiting for you in your emergency fund.
A windfall of money can accelerate your savings rate, but you might have other financial obligations eating into your budget. The good news is that it doesn’t have to be an all-or-nothing situation. Let’s say you have two children under 6 and will be receiving $600 as your final CTC payment. You might consider splitting that money across different financial goals. Maybe you put $400 in your savings account and spend the rest on gifts for your family so that you don’t rack up holiday debt this year. You can get creative with how you use your CTC money to bolster your savings.
Reset after the holidays.
The new year is a great time to assess your financial health. When you look back on the year that just passed, did you meet most of your financial goals? If not, what got in your way? If you encountered surprise expenses or experienced a dip in income, now is the time to take a breath and reset. Once you’ve clarified your financial big picture, zero in on the goals you’d like to work toward during the year ahead — like beefing up your emergency fund.
Squirreling away six months’ worth of expenses can feel intimidating, so start small. Make a plan to automatically transfer some portion of every paycheck directly into your savings account. Decide on a comfortable number, then set it and forget it. That money can add up over time with virtually no effort.
Leverage future cash windfalls.
CTC payments provided a wave of unexpected money for many American families. A family with three children under 6 could receive a total of $5,400. These payments are winding down now, but they might have inspired you to use future cash windfalls to build your savings account.
This can take many different forms. In 2021, 62% of consumers expected to get a tax refund, according to the National Retail Federation. Instead of treating this money like extra income, you may be better off putting it right into your emergency fund and calling it a day. The same goes for other “found money” like work bonuses, raises, cash from side gigs, or an inheritance. They can all provide a nice boost to your savings account in one shot.
Find ways to increase your income.
Raise your hand if you like the idea of having more money each month. One way to establish a healthy savings account is finding ways to bump up your income. The idea is to maintain your current standard of living while directing extra funds into your savings account. Once you hit your savings target, you can either back off or keep going; whatever feels right to you. Just be sure not to burn yourself out — aim to meet your goal in a way that doesn’t force you to make unreasonable lifestyle adjustments.
With that said, the following action items could supercharge your savings:
- Pick up a side hustle
- Take on a roommate for a few months
- Opt for public transportation or carpooling
- Start meal planning and cutting your takeout orders
- Cancel cable and other unnecessary expenses
- Explore new career opportunities
In the end, a solid savings account can come to the rescue when you need it most. CTC payments are coming to an end, but new stimulus packages could always crop up again in the future. They represent just one way to bulk up your emergency fund. DailyPay can also get you moving in the right direction. We provide on-demand access to your earned pay to make saving that much easier.
