Smart Money Podcast: Savings Tips and Updates to the Child Tax Credit

Liz Weston: Welcome to the NerdWallet Smart Money Podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money.

I'm Liz Weston.

Sean Pyles: And I'm Sean Pyles. Before we get into this week's episode, I have a question for our listeners. What are your money questions? What is the financial decision that you are thinking of making right now, but you aren't sure if you're making the right choice? Well, send your money questions our way, and we will help you answer them. Call or text us on the Nerd hotline at 901-730-6373. That's 901-730-NERD, or email us at [email protected].

Liz: On this episode, Sean and I answer a listener's question about the child tax credit and how to think about the money that many parents will start receiving in July. First though, in our This Week in Your Money segment, Sean and I are talking about our favorite money-saving tips.

Sean: That is right. Regular listeners of the show may remember the survey that we kept bugging you about a couple of months back. Well, you spoke and we listened. A lot of you wanted to hear about our tips for saving money, so Liz and I are going to give you some of our favorite tips and discuss how we each approach savings.

Oh, and a quick heads-up before we start the conversation, you might hear some jingling in the background, and that is my cat, Argus, running amok. So, please do not mind the sounds that he's making. Thank you.

Let's get into it.

Liz: Now I'm always confused by the term "saving money." So are we talking about ways to put money aside or are we talking about spending less?

Sean: Yes.

Liz: That was helpful.

Sean: I think when it comes to saving, putting aside money and trimming expenses are really two sides of the same coin, but let's take each aspect one at a time. Let's start with spending less.

For me that really starts with doing a budget evaluation. I like to do this quarterly. I run through my credit card and bank statements and really look through everything that I have spent money on and maybe shed a tear for how much money I have spent, and think about what I don't really want to be spending money on anymore. For example, I just got an email actually from one of those food delivery subscription services saying, "Oh, by the way, your annual subscription is about to be renewed." And I was thinking to myself, "Well, I don't even really use the service anymore. I've also heard a lot about how they aren't paying restaurants or their workers enough." And so that was a pretty easy trim that I could make to my budget. And then, boom, I have $10 back a month to do whatever I want with.

Liz: I think looking at those subscriptions is a really good idea right now. I mean, some of them got us through the pandemic, or the worst of the pandemic I should say, and we don't necessarily want to continue with all of them. I don't know that I need seven or eight or whatever streaming services that we have right now. We wound up paying as much as we did for cable, but we needed it at the time and my daughter needed her anime, heaven knows, so that's what we did.

Sean: Crunchyroll.

Liz: Yeah, exactly. I like doing a no-spend month. That is absolutely my favorite way to reset spending because I'm only spending money on essentials. And I get to define what that is so it's very flexible, but it does keep me from mindlessly spending in ways that don't necessarily serve my goals.

Sean: I've had to do that, especially since I've been getting ready to move into my new house. And, as I'm sure you know well, Liz, it turns out buying a house is really expensive. And not just buying it; filling it with all the things you need. Who knew that shower curtain liners, and brooms and all these things can add up to hundreds of dollars? I know a lot about that now. So I've been doing a similar, no-spend month, where if it doesn't relate to something that I need immediately for the house, I'm not going to just be spending money on it.

That means that I am no longer shopping through eBay for vintage clothing and spending money on it — something I probably didn't even need to do before this anyway, but it's helped me have a sort of no-spend month as I'm getting ready for this big, big expense that I'm taking on. That way I can also understand where I can save money in the future because I realized that, "Look, I went two months without buying any vintage clothing on eBay. Maybe I can do that for another two months."

Liz: Well, and you mentioned vintage clothing, which triggered thrift shops, because they're all open again or almost all of them, and that's a great place to start looking. Yeah, you have to sift through a lot of stuff, but you're not only finding things that are less expensive, you're helping the planet because you're not buying new, so that's a great way to save money.

Sean: Yep. Especially for fun, kitschy knickknacks that I just love to populate bookcases with. You can find some of the best stuff at thrift shops. Those are some ways that you can actually trim money from your budget so you have more to save. And that, again, as we mentioned is one half of the equation, and then the other half is actually knowing how to tuck away your money and tuck away as much as you can.

For me, automating savings and setting goals and actually setting up multiple accounts for different purposes has been a life-changing aspect of saving for me. I actually took a page out of your book, Liz, recently, where I set up multiple savings accounts with my online bank, my high-yield savings account bank. So I now have five different savings accounts.

I felt a little bit ridiculous, but I also felt kind of like a mad genius at the same time as I was doing this. I have one that's my emergency fund. I'm at a certain threshold where I feel like I have a good amount in there, but I'm still continuing to contribute to it regularly, a certain percentage of my income. And then I have a separate account for car expenses, because late last year I had a big car expense that took some money out of my emergency fund, and I thought, "I don't want that to touch my emergency fund ever again." So now I have my own fund for it.

I also have one that I'm just calling fun money. This is for things like trips or again, vintage clothing that I don't necessarily need, things that I haven't allocated, so I can spend this money and not feel guilty about it. And then another one is for a big purchase for my house. It turns out that fences are very expensive, considering how much lumber is. I got an estimate and a fence for my house is going to cost me $11,000. So I have a not-so-fun fence fund that I'm slowly building up to.

Liz: All right. Well, good for you. And yes, on the emergency fund, the continuing to save for that. I think that's a concept that is hard for a lot of people to get. They think of an emergency fund as a goal that they have to get to at a certain point and then boom, they're done, and actually it's rinse and repeat. You're constantly putting money in, constantly taking money out, because life happens. There's just something in my brain that likes to have a label on things. It helps me not dip into my emergency fund for non-emergency purposes, but it also tells me the money is there when I need it. We have, I think, 10 of these now.

Sean: Oh, wow.

Liz: Yeah. We have life insurance to pay for, property taxes. Like you said, car expenses, home expenses, that's another big one. The recommendation is you put aside 1% of the value of your home every year to cover various expenses for maintenance and repairs. That's totally rule of thumb. You could spend a lot more, you could spend a lot less, but that's a good sort of place to start.

Sean: I think that's a really good idea because with Garrett's house here in Portland, it's a handful of decades old at this point, and some things just aren't working the way they should. We had a big downpour the other week and turns out there's a small leak in our roof. So we have to figure that out. Also every time we run the dishwasher, a fuse blows. So we have to get an electrician out here to figure that out. So, things that you just don't expect and it's frustrating to have to spend that money, but if you have it allocated already in a specific fund, you kind of can swallow it a little bit easier, I think, because you knew that this was going to come up in some shape or form.

Liz: And water is one of those classic things where if you ignore it, it's going to get much, much worse.

Sean: Oh God. It's very scary. Yeah, a small leak is never just a small leak because think about where it's seeping into the wood. Yeah, it's a nightmare basically.

Liz: Well, and the reason that we can do this so we can have all these savings accounts is, as you said, is we're using online banks that don't have minimums, that don't have monthly fees and that allow you to nickname these accounts, which most of them call sub-accounts, with different names so that you know exactly what your money is going for, and you set up those automatic transfers and you don't have to think about it, which is great.

Sean: Yeah. And that's key. So when you first laid out your saving strategy like this, I thought that it was maybe overkill, I'll admit.

Liz: A little OCD. OK.

Sean: Yeah. Now I'm totally bought in. Part of it is that I thought that you were having a different account at a different bank, which is just not the case. You can basically clone the account that you already have with the bank that you already have and just continue to put money in it, give it a nickname and have that be your new savings goal.

Liz: Yeah, exactly. Groceries are a big part of people's budget. So how do you save money on food?

Sean: We try to take on a new approach to how we shop for groceries. It's become slightly more complicated, but also simpler at the same time, if that makes sense.

Liz: You have to explain that.

Sean: In one area, we have really been homing in on some specialty grocery stores. We make a lot of Mediterranean food at our house and we have a great Mediterranean grocery store in our neighborhood. We can get the kind of niche spices that you think are really expensive and difficult to acquire right there. You can buy them in bulk, and they're actually really affordable. So we've been trying to do more things like that because we know that we can again, shop local, get the things that we need and spend less money, even if it does mean an extra trip. Fortunately, we can just walk there in our neighborhood, but that's one way where again, it's become a little bit more complicated.

But on the streamline side, we actually get pretty much everything else: milk, eggs, bread, etc., from one of the big-name grocery stores in the area. We have been shopping there for so long, and they have a pretty good loyalty program, that they just throw coupons at us. Every single week, we're getting something new in the mail it seems, and I will admit I'm a sucker for that. They are keeping this virtuous cycle going where I keep shopping there again. So we use as many coupons as we can because they're pretty well targeted, fortunately.

I've been doing a lot of curbside pickup, which I find helps me not buy things that I don't need, which I love to do at the grocery store. So this way I can just get the things that I absolutely need for the recipes for the week ahead, and I don't have the temptation of going down the cereal aisle, which for some reason, I just love to buy like five different kinds of cereal all at once and have variety and mix them together.

Liz: That's so millennial.

Sean: Yeah. I just love a good candy cereal basically. This way I'm only buying one box because I probably have a coupon for it and I don't need the other ones anyway. That's how I've been doing it.

Liz: I think a lot of people don't realize that the sales at grocery stores are on real cycles. There'll be a small discount maybe every three or four weeks, and then the big discount is every three months. So, you start to train yourself to look for those bigger discounts and stock up. Now you need to have some space to put the stuff and you need to actually eat the stuff that you buy. That's a key part of it. You actually can save a lot of money, especially if you're piling coupons on top of these discounts.

Sean: We have an article on NerdWallet that's just titled "How to Save Money on Groceries." Very aptly titled, I'd say. The first one is check your refrigerator first, which is something I am guilty of. Because again, with making a lot of Mediterranean food, we need flat leaf parsley in pretty much everything. So whenever I go to the store, I think, "Might as well just get some. Might as well get two bunches," and I go home and it turns out there's one slowly rotting in the back of my fridge. They're not that expensive. It's a dollar for both of them maybe, but still it adds up over time. I just feel that pang of guilt that I wasted something else. So absolutely do that. Even if you're just shopping from your phone for a pickup order, just go to the fridge, check it out and make sure you don't actually have what you already are purchasing.

Liz: Well you mentioned the flat leaf parsley and that reminded me that having a little garden in your windowsill for herbs can save you a ton of money. I've got basil planted out in the garden, but I have oregano and thyme and sage in my windowsill. You pay once for the seeds or for the little plants and you've got it for quite a while.

Sean: The thing is that we actually were growing some parsley last year, it didn't make it over the winter, but let me tell you our mint and our thyme have exploded. If you are going to plant mint, here's a little gardener's tip, because in case folks don't know, I'm really into gardening, pot your mint into an actual pot before you put it in the ground, otherwise it will take over your entire garden. We have mint for mojitos or anything else we want, whenever we want it.

Liz: Fabulous. I love that.

Sean: All right, with that, I think we can get onto this episode’s money question.

Liz: Let's do it.

Sean: This episode's money question comes from a listener's voicemail. Here it is.

Isabel: "Hi. My name is Isabel, and I have a question. Since Joe Biden has put in, or Congress has put in, this $300 or $250 a month spending for child care or other items that you may need for your child, is it a good idea for me to remove my FSA child care contribution, since typically what I was using it for, and from my understanding, it sounds like the $300 is supposed to be the same as this? I would really like to know if I need to make any changes. Thank you."

Liz: Our listener is asking about the monthly payments that most families are about to get starting in July. These payments of up to $300 per child per month were part of the latest stimulus package. To tell us more about these payments, we're joined by tax Nerd Tina Orem.

Sean: Hey Tina, welcome back to the podcast.

Tina Orem: Hi there. Glad to be back.

Sean: Glad to have you as always. There were some big changes to the child tax credit this year. So can you just start by giving us a rundown of what people should know?

Tina: The child tax credit certainly has changed a lot this year. It's no surprise that there are questions about it.

Here's some basic things to know about the child tax credit this year, and there are a lot more details behind this, so this is just kind of an overview. First, it offers up to $3,000 per qualifying child, 6 to 17. It's the child's age at the end of the year on Dec. 31, 2021, that matters here. Also the credit goes up to $3,600 if the child is under 6. Another important thing to know is the higher credit is reduced or phased out for incomes over $150,000 for married taxpayers filing jointly, or $112,500 for heads of household and $75,000 for single filers. If you qualify this year, the IRS may send up to half of that credit to you early in the form of monthly payments that run from July through December.

Liz: The IRS is doing something that it's never done before, which is to send out these monthly payments and they're going to base it on your 2020 tax returns. So if you haven't filed that and you qualify for the credit, you probably want to do that now. If they don't have a tax return for you, they will use your 2019 return.

Sean: As we know, a lot of folks' income changed drastically from 2019 to 2020. So it's probably a good idea to get that updated tax information to the IRS.

Liz: This money could be life-changing potentially for a lot of families, but does it mean that families should stop contributing to a flexible spending account?

Tina: Whether you keep contributing to your dependent care FSA isn't necessarily a function of whether you're getting the child tax credit. In fact, you may want to consider continuing to make those contributions because they can really reduce the amount of your income that's subject to tax.

Sean: Yeah, I think we should take a quick step back because we've been talking about a lot of numbers and acronyms that folks may not be familiar with. Tina, can you give us a quick explainer of what exactly FSAs are?

Tina: Well, FSA stands for flexible spending arrangement, some people say flexible spending account, and they can cut your tax bill. Basically, whatever money you contribute to an FSA reduces the amount of your income that's subject to income tax. Typically you get access to an FSA through work, so many employers offer them as a benefit. You contribute to it through voluntary deductions from your paycheck and whatever you contribute isn't taxed. Sometimes employers will even contribute free money to your account. So the catch though, if you want to call it a catch, is that you have to use the money for health care expenses.

Now there's another flavor of FSA and it's called the dependent-care FSA. For dependent-care FSA, typically you have to use the money for child care or to care for a dependent while you work or look for work. I think this is the type of account the caller is asking about.

Dependent-care FSAs can be pretty great because they cut your tax bill simply by funneling the money that you're already going to spend on, say, day care through the account. For example, instead of having your whole paycheck deposited into your regular checking account, you can have some of the money that you know you're going to spend on day care, put directly into your dependent-care FSA account, and then you pay the day care provider like you normally do, and then you get reimbursed from the FSA. If you do it that way, that means that the money that goes into the FSA account isn't subject to income tax.

Liz: I think where our listener's confusion came up is that the FSA for dependent-care can conflict with another kind of tax credit, which is the child care credit. These names are so close to each other, the child tax credit, the child care tax credit, that it's not surprising people get confused. As you mentioned, this new tax credit doesn't have anything to do with dependent care, so you don't need to worry about a conflict between the two of them.

I just remember trying to wrestle with this when my daughter was younger, figuring out which was the better tax break and how to make it all work. It's really confusing because these different tax breaks have different qualifying ages. They have different phase-out amounts. They have different amounts. Trying to get it all straightened out was kind of difficult.

Sean: It seems like our listener is also interested in learning how they can reduce their tax bill as a parent. What options do folks have here?

Tina: Yeah, this all brings up the bigger question of how else parents can reduce their tax bills. We've got a lot of ideas for you, and you can learn more about that on the NerdWallet site, but here's a few that you might qualify for in addition to the child tax credit.

One is the earned income tax credit. That's something to look into if you made less than about 57, $58,000, you could get up to about $6,700 depending on your filing status, your income level and how many kids you have. And you don't have to have kids to qualify for that credit.

Another option that Liz mentioned too, is the child and dependent care tax credit. That one's worth a percentage of your child care costs. Again, depends on how many kids you have, how much you spend for care and your income.

Another one is the adoption credit, which can get you over $14,000 depending on your income and the needs of the child.

Those are just three. There are more.

Sean: I was going to ask about contributing to a 529 plan. This is, for folks that may not know, it's a college savings vehicle that a lot of parents take advantage of. The savings will depend on what state you're in and the rules of your state, but that is an option that some parents take advantage of.

Tina: Absolutely. And there are other education-related tax credits and deductions too.

Liz: Yeah, I'm a huge fan of 529s. They're going to help pay for my daughter's college, which is coming up pretty quick. The nice thing about it is that most states do offer some sort of tax break or other help to contribute. California, unfortunately, is not one of them. The money grows tax-deferred, and when you use it for qualifying education expenses, it's tax-free. So it can be really helpful because college is expensive.

Sean: All right, Tina, well if you have any other thoughts on the subject that our listeners should keep in mind?

Tina: Yeah. With regard to the child tax credit, stay on top of it. Things are changing. U.S. Treasury is trying to set up an online portal for people who'd rather not get the monthly payments and claim all of the tax credit at the end of the year, for example, or have updates. As of today where that stands is still developing, so just stay tuned for that.

Sean: Well, thank you so much.

Tina: Anytime.

Sean: And with that, let's get on to our takeaway tips. I can kick us off. First step, Get familiar with the changes to the child tax credit. The child tax credit is higher this year, and you could get half of it in monthly payments starting this summer.

Liz: Next, you don't have to ditch your FSA. A dependent-care flexible spending account, if you have access to one, can be an easy way to cut your taxes.

Sean: And the tax benefits don't stop there. There are lots of other potential tax benefits that come with being a parent, so talk to a qualified tax pro about what's available to you.

Liz: That's all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at [email protected]. Also visit nerdwallet.com/podcast for more information on this episode. And remember to subscribe, rate and review us wherever you're getting this podcast.

Sean: Here is our brief disclaimer, thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes, and may not apply to your specific circumstances.