The Best Ways to Spend Your Child Tax Credit Money, According to Experts

The first of six monthly child tax credit payments hit millions of bank accounts this month, providing families with up to $300 per child. It's cash that many parents may not have planned for, which makes it an excellent opportunity for improving your family’s finances.

Enhancements to the 2021 child tax credit increased the maximum amount from $2,000 to $3,600 for children under 6 and $3,000 for all other children under 18, with half of each credit being paid out monthly between July and December of this year. While there are no limits as to what families can use the money for, the credit is designed to help those who are most in need of financial assistance make ends meet.

But there’s more to a family’s financial health than just making sure you can pay the bills. That’s why we reached out to financial planners and advisers for their tips on how your new child tax credit windfall can be put to good use. Here’s what they recommend:

1. Cover your most pressing needs

If it seems like an obvious point, that’s only because it’s such an important one: Put that extra money toward the biggest burdens on your wallet.

As many parents return to working in-person this summer, spending on essentials is most likely going to increase. Not only will you need to once again cover the costs of commuting, but also the often sky-high price of childcare: A 2015 study from the Economic Policy Institute found that the cost of infant care was higher than the average cost of in-state college tuition in 33 states. For the millions of parents whose child care bills eat up a decent chunk of their budget, the monthly child tax credit payments can be a major source of relief.

Even if you don’t need help paying for childcare, timing the monthly payments to cover your monthly bills can help you avoid the stress of trying to stretch your income through the end of the month.

“Figure out what are the most immediate needs,” says Daniel Milan, a managing partner at Cornerstone Financial Services. “This [money] is something that can help you in a hardship when your back’s against the wall.”

2. Pay off high-interest debt

Paying off high interest credit card debt is “like investing in a high guaranteed return,” says Marc Schindler, a founding partner at Pivot Point Advisors.

According to data from the Pew Research Center, the median net worth of the poorest 20% of children has mostly been in the negatives over the past 40 years. This is because many low-income families have more debts than assets, putting these children at a major disadvantage compared to their highest-income peers, who held 248 times as much wealth in 2016.

While it’s obviously a difficult feat to, the additional help from the advanced payments can help push you out of debt and your children into better social and economic outcomes in their lifetimes: A study of 9,000 children from the University of Wisconsin and Dartmouth College found that lower levels of debt correlated with higher levels of childhood wellbeing.

3. Fund your family’s savings

Once all of your immediate needs have been covered and you’ve handled any credit card debt, then experts agree that your next step should be to put the money from your child tax credit payments into savings.

“For those with an underfunded emergency fund, consider using these payments to shore up that foundation for your family,” says Michelle Petrowski, a certified financial planner.

Even before the pandemic-fueled recession stressed just how necessary it is to have an emergency fund, it was already the case that Americans struggled to save money: A 2019 study from the Federal Reserve famously found that four out of 10 people don’t have enough cash on hand to cover a $400 surprise expense.

If you're trying to figure out where to put this infusion of extra cash, follow this rough order: Build up three to six months' worth of emergency savings first, next make sure you're saving enough for retirement (you eventually want to save 15% of your income) and then focus on your family’s specific priorities like buying a home or better car.

4. Put it in a 529 college savings plan

Nearly every expert we spoke to mentioned opening or contributing to a 529 plan, which is an investment account that offers parents a tax-advantaged way to save for their children’s education. The big draw is that you can grow your money through investments and then pay for education-related expenses like tuition or room and board without having to pay federal income taxes.

As long as you use the money for qualified purchases, you’ll get tax-free growth and tax-free withdrawals, according to Clark D. Randall, a certified financial planner and founder of Financial Enlightenment. Plus, you’re using untaxed money to fund it with the child tax credit payments.

“It's a triple dip benefit not available anywhere else in the tax code,” he says.

Parents should note that if they do pull the money out of a 529 plan for payments that don’t qualify, they will end up being hit with penalty fees.

5. Plan some summer fun

Okay, pick your jaw up off the floor: If your financial house is completely in order, then there’s nothing irresponsible about using some money to spend quality time with your family.

The enhanced child tax credit was included in the American Rescue Plan both to help millions of struggling parents and also to stimulate the economy by boosting consumer spending. With some of the hardest-hit industries like hospitality and entertainment finally on the path back to normal, you could support that growth by planning a weekend getaway or going to a concert as a family.

But while we at Money are all in favor of using extra cash to fund purchases that are exciting and engaging, it’s important to still spend responsibly. Make sure that all of your other ducks are in a row — that is, the financial goals we outlined above — first to avoid overspending money you don’t have.

More from Money:

Child Tax Credit Eligibility: Who Gets IRS Payments This Week?

6 Expert Tips for Navigating the New Monthly Child Tax Credit

Child Tax Credit Update: You Can Now Change the Bank Account Where the IRS Sends Your Payments