Wednesday, October 27, 2021
HomeCompound Daily News2021 Coronavirus Stimulus Checks Open Compound Interest Opportunities

2021 Coronavirus Stimulus Checks Open Compound Interest Opportunities

On July 15, the United States Internal Revenue Service started issuing stimulus checks, the first of six Child Tax Credit (CTC) payments, to American families raising children during the coronavirus pandemic. These payments, which can be as high as $300 per month for some families, are part of the American Rescue Plan, and they could be the final economic recovery measure enacted by the administration of President Joe Biden, who had previously authorized a $1,400 payment for individuals as well as for each of their dependents.

What the Child Tax Credit Means for the Future

Shortly after the CTC payments started going out via direct deposit on a Thursday morning, news media outlets were pondering the likelihood of yet another COVID-19 relief payment of up to $2,000 per individual. While this option was not completely off the table as of mid-July, it seems as if it will be superseded by these CTC payments, which in the future may become a permanent fixture of the IRS tax code, but they would no longer be disbursed by means of monthly checks.

What the Child Tax Credit Means for the Future

While the intent of these payments is to provide financial relief and cover household basics, there may be situations in which CTC cash could be put to work and turned into a smart compound interest investment. Before we look at a couple of compounding scenarios that feature stimulus checks, let’s review some basic information about these credits:

  • As their name implies, CTC payments are meant to alleviate some of the household expenses of raising children; you qualify if dependent children under the age of 18 live in your household, but the adjusted gross income must be $75,000 or less for individuals and no more than $150,000 per year for couples.
  • If you qualify according to the aforementioned criteria, you should start getting CTC payments via direct deposit or mailed checks; this would assume that you already filed a 2020 tax return and that you qualified for the third round of stimulus checks.
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Let’s say a family of four with a combined AGI of $120,000 per year is raising two children under the age of 12. In this case, the amount of CTC payments would be $600 starting in July and continuing through December for a total of $3,600 received in 2021. If this family is able to deposit each Child Tax Credit payment into a money market account with a 0.61% annual percentage yield, which would be the best bank offer in 2021, the future investment value would be $4,206. For a family caring for two young children nowadays, this would translate into a nice cash infusion just in time for the holidays.

The Best Way to Utilize CTC Stimulus Checks

The Best Way to Utilize CTC Stimulus Checks

Since there is a wide consensus that CTC payments are here to stay, we can adjust the scenario above to reflect a whole year of compounding, which would mean $7,823 by late July in 2022. Further assuming that the account compounds on a daily basis and that payments continue through December 2022, we are looking at a future investment value of $11,452. In essence, this family would be turning the monthly Child Tax Credit benefit into more than $10,000 in just a year and a half.

Even if the CTC payments go from a monthly frequency to an annual tax credit disbursed as part of IRS refunds, the family should try to stick to the $600 monthly contribution to the money market account, which by now would have turned into a compound interest portfolio of investments. Should they be able to prolong their contribution streak for ten years, they could end up earning close to $75,000.

We all know that payments for coronavirus economic relief are bound to stop at some point; more than likely, only the CTC program will prevail, but we should not forget the hard lessons that the pandemic has taught us. Cash reserves are not easy to build, but they are always worth the effort, and compound interest investing strategies are the best tools we can use to this effect.

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