Child tax credit money: Make a plan now for how to use it when it comes - CNET

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What could you do with the child tax credit payments?

Sarah Tew/CNET

Starting this summer, the IRS intends to make the first payments as part of the expanded child tax credit. You'd normally see the child credit after you file your taxes each year, but with President Joe Biden's March stimulus bill, this year if you and your family qualify you'll get the money in a series of payments through the end of 2021 and into 2022. In total, the payments top out at $3,000 or $3,600 per child, depending on their age, spread out over the course of a year, and are in addition to the payments included in the American Rescue Plan, including the third round of stimulus checks. The question is, what do you do with the money? 

These payments can be an opportunity to get your financial house in order. To help you consider the different ways you can use these payments, we spoke with financial experts for their recommendations on ways to use this money, from meeting urgent needs and paying down debt to building up an emergency fund. This expansion of the child tax credit is part of a larger multitrillion-dollar effort by President Joe Biden's administration to lift the country out of the pandemic and put individuals and families on better economic footing. This child tax credit is a key piece of Biden's plan to get money into the pockets of families who need it most.

Of course, the money comes with no strings attached, and you can use it as you want. But if you're looking for ideas for how to make good use of the payments, we have suggestions. For other ways you save or get money this year, here's what is happening with canceling student debt, how to see if your state has money of yours you can claim, and how March's stimulus bill can help you save money on health care costs.

First, make a plan for how you will use your child tax credit money

Your first child tax credit check may not come for weeks, likely not until July, so you have time to make a plan for what you are going to do with the money before it arrives. 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.

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."

Here are some of the ways you could plan to use the money.

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Meet your family's basic needs

Cover your family's urgent needs first: Budget 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.

Pay down your 'toxic' debts, including credit cards

Once you've got necessities covered, depending on your situation, 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. Clary said "toxic debt" includes high-interest unsecured debt such as credit cards and small-dollar loans and debt that has gone into debt collection and could become a bigger problem for you later.

You can use the money to pay down your toxic debt.

Sarah Tew/CNET

Start an emergency fund

Next, you may want to set up a rainy-day 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 stress on a family, because you know that when you face an emergency, such as your car breaking down, you will have the expense covered. 

Though the rule of thumb is to have 3 to 6 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 the future

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.

You could also put some of the money toward building up an emergency fund.

Sarah Tew/CNET

Get help making a savings or debt-reduction 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 advisor. 

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.

What about spending it on things you want instead of things you need?

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 advised not using it on a large-screen TV, for example, or to throw a party, until you've hit the other items you 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 employment insurance, how the next stimulus plan could benefit you, and how you could get up to $50,000 back with one-time COVID credits.

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