The extra cash paid in advance this year can help families with basic necessities.
Sarah Tew/CNETStarting next month, over 36 million American households will automatically receive their first advance payment of the 2021 child tax credit. In past years, parents would have received the credit much later, when they file their income tax return the following year. Now, eligible families will get the money in early installments through the second half of 2021, amounting to $3,000 or $3,600 per child by 2022. All working families will get the full credit if they earn less than $150,000 for a couple or $112,500 for a family with a single parent (the amount phases out for higher incomes).
The question is, what's the best way to use that money for your family? Some will need the money for everyday expenses, like diapers, groceries and utility bills. Others may want to save it to help their household get on more solid footing for the future. We spoke with financial experts and credit counselors for their recommendations on ways to spend and save this money, from meeting urgent needs and paying down debt to building up an emergency fund.
Low-income families with children are also eligible for this crucial relief, including those who don't make enough money to file tax returns. And if you have multiple dependents, there is no cap on the total credit amount you can claim. For more about the child tax credit, here is what to know about the coming IRS portals that will help parents see if they're eligible, opt out of advance payments and update their personal details. We have recently updated this story with new information.
Make a plan for how you to use monthly child tax credit checks
The first child tax credit check comes July 15, so you have time now to make a plan for what to do with the money before it arrives. To get started, you can figure out how much you can expect (overall and per month) using CNET's child tax credit calculator by providing a few details: how many children you have, your income and your filing status.
If you don't want the advance partial checks, but would rather have the full payout next year during tax season in 2022, you'll have to unenroll in the monthly payment plan. There are several reasons why you might want to opt out, like if you're planning for a major expense like a car or college tuition. In order to opt out, you'll have to use the Child Tax Credit Update Portal, which will be accessible before the end of June.
Next, think about your financial goals for using the money. "The most important thing is to start planning now," Emily Shallal, senior director of customer strategy and innovation at Ally Bank, told CNET. "You don't want to look back on this money with regret and wonder what happened."
Use the payments to meet your family's basic needs
Cover your family's -- including your children's -- urgent needs first by budgeting for groceries, housing, utilities and essential supplies such as medicine. You could use some of the money on a necessary car repair, or a medical or dental procedure you've been putting off for someone in your family.
Pay down 'toxic' debts, including credit card debt
Once you've got the necessities covered, it may make sense to take on your costliest debt. "If you're in a situation where you have a lot of what I would refer to as 'toxic debt,' paying those balances off should be your No. 1 priority," Bruce McClary, senior vice president for communications at the National Foundation for Credit Counseling, told CNET. "Toxic debt" includes high-interest unsecured debt such as credit cards, small-dollar loans and debt that has gone to collections (which could become a bigger problem later).
You can use the child tax credit money to pay off some of your toxic debt.
Sarah Tew/CNETStart a 'rainy-day' emergency fund
If you are meeting other needs, you may want to put some of the money from the checks into an emergency fund to create a financial cushion. According to Mike Schenk, deputy chief advocacy officer for policy analysis and chief economist at the Credit Union National Association, a rainy-day fund can reduce a family's stress. Such a fund means when you face an emergency, like your car breaking down or an enormous hospital bill, you could have the expense already covered.
Though the rule of thumb is to have three to six months' worth of savings in an emergency fund, that amount may be impractical for some. Schenk told CNET he recommends that you start with a more modest goal -- say, $1,000 -- and work your way up to a larger buffer.
Budget for a big future expense
You could also choose to put some of the money toward your savings to meet a longer-term goal -- for a down payment on a house, for example, a 529 account to help pay for college or a trade and vocational school, or to build up your retirement account. If you think receiving the monthly checks are too tempting to spend right away, you might consider getting one large sum for the child tax credit in spring 2022. That way you can put a large chunk aside then.
Watch this: Child tax credit: Everything we know
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Ask for assistance in making a debt-reduction or savings plan
If creating a debt-reduction plan or savings plan seems intimidating, you can get affordable (or possibly free) help from a debt-reduction counselor or financial adviser.
A nonprofit credit counseling agency such as the National Foundation for Credit Counseling can help you manage your debt, whether it's from credit cards, a home mortgage or student loans. And the agency can work with your creditors to set up reduced-payment agreements, and then help manage your payments to those accounts. In most cases, an initial debt-counseling session is free, Clary said, where you can meet with a debt counselor to go over your situation and get specific recommendations. If you decide to work with a counselor to manage payments to your creditors, the agency may charge $25 to $35 a month to manage your plan. For those below the poverty line, the agency can waive those fees.
You can also work with a financial adviser to create a plan for how to use the child tax credit money and to set goals. Schenk said as a member of a credit union, you can work with an adviser to create a plan for your specific situation. Other financial institutions such as banks may also offer financial advice as a service.
Spend on things you want? Maybe
The advisers said you could set aside some of the money for something special for yourself and your family. Take your family out to dinner, for example. But they advise not using it on a large TV or to throw a party, for example, until you've hit the other items outlined in your plan. "You may end up in a time when you really need the money and just have a bunch of impulse purchases," Clary said.
For more ways to save money, the IRS may owe you money for taxes you paid on 2020 employment insurance, how the next stimulus package could benefit you, and how you could get up to $50,000 back with one-time COVID-19 credits.
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