Help Me With My Finances

[questions]

I would really appreciate it if you could give me some advice in a realm that I am so unfamiliar with.

I'm a 31 year old, who up to this point in time has never saved a dime in her life, and has not set any financial goals for herself (uh... I think talking about myself in third person somehow helps me deal with this sad reality). I apologize if this gets too lengthy or personal...I married young and am currently going through a divorce, my ex and I own a house together (that I only helped pay for 5 months) we settled on an agreement that I would get a percentage of the equity at the time he refinances plus the amount my parents chipped in. The amount came out to roughly 36.5K.

So here are my three questions.

1) I will be receiving this in one check, I would like to repay my parents immediately, do you happen to know if I will be penalized by the IRS, regardless of what I plan to do with the money (28K will immediately get transferred to my folks)

2) I currently have credit card debt at about $8220.00. I will have $8500.00 in cash from the remaining equity money. I have nothing in savings, and owe the government about 2500.00 in taxes (just found out that I should have been claiming single on my w-4, I have been paying in installments) I'm trying to figure out whether or not I should pay off my credit card debt completely, or pay most of it off and keep a smaller balance on a lower interest card, keep some extra cash and or pay off the taxes owed to the government.

3) Once I figure out what to do with this 8500.00, I'd like to start reading up on investments and what I can do. My company offers 401k which I have yet to take advantage of. I'm not even certain what I should be claiming on my W-4...can you recommend any literature for a novice like me?

whoa, that was a mouthful...I borrowed a few Suze Orman books from the library (didn't know who else to look up) I'd like to really focus on taking control over my finances from here on out.

Thank you again, for taking the time to read all this. Any advice you could give me would be much appreciated.

[sweeps]

Regarding #1, I'm not a lawyer but it seems you could make a strong argument that the $28K from your parents was a loan, so you wouldn't trigger the gift tax by repaying them... But even if it is subject to gift tax, you're allowed to freely give $11K per person per year. So you could give $22K now and $6K on January 1st if you want to play it safe.

Regarding #3, does your company's 401(k) plan offer a match? If so, take advantage of it. If your company matches up to the first 6% for example, then contribute 6% if you can afford it.

[JBinKC]

Its simple you have to live below your means to save and you will have to look at all of your habits good and bad to accomplish it (Either you have to make more and/or spend less).

I would tackle the debt with the highest rate of interest first.

I would only attempt to fund a 401 K up to the point where the company matches the contribution now.

And knock on wood to stay healthy.

[terry1156]

You should give yourself a pat on the back for asking the questions you are. taking the steps to learn is the first, and most important, step to getting your finances in order. the past can't be changed, but if you begin to get your finances in control from today, you'll be fine. You're taking the right steps and that is more than a lot of people do.

I think your first step would be to go to the personnel department at your work and change your with holding to one person so you don't get another surprise next year at tax time. While you are there, you can look up exactly what your 401k pays - contributing to it up to the match is a good idea.

What is the interest rate on the tax money you owe compared to the lowest credit card rate interest? I would probably pay off the highest interest first, but I can see an argument of paying off the taxes owed first - while credit cards are unsecured debt, the IRS will be wanting its money no matter what. If it works out, pay off the high interest credit card and the taxes and then begin paying of the lower rate card asap.

After putting in the match to your 401K I would start building an emergency fund before investing anyplace else.

[Tree0164]

Welcome to the board.

Do you have a budget?

Cut up the credit cards.

Pay off the back taxes

Establish a small emergency fund of atleast $1000

Start a 401k at work contribute to the matching amount

Be aggressive in paying off your credit card debt

If you are looking for some books to read, I recommend Dave Ramsey

Good luck!

[markio26]

my advice.. is to just read, everything you can get your hands on about finances... the freebie section has alot of free magazines, kimmie and flash post... i would start there.. go to your local library and check out as many self help books that you can at one time and just skim thru them... the point here is to retrain your brain... you know how you play a hand of cards, and it is over... then the next hand you play, your brain is still remembering what you needed or didn't have from the last hand.... you have to reorganize and tame your brain... i swear... call vanguard and they can send you some phamplets with answers to similiar questions....

[mizutamago]

THANK YOU THANK YOU to everyone.
All of your advice has been tremendously helpful.

Just to update:

I will be paying my entire credit card debt off, and should be able to pay back the IRS within the next three months. From there I will be able to save at the very least, 700 dollars a month. Once I have saved enough of an emergency fund, I plan on investing my money elsewhere.

I just found out the my Credit Union offers Share Certificates.
I can't really make heads or tails of what it all means can any of you?
It seems that the longer the term, the higher the yield, would this be a good way for me to save up for a house?

Thank you again to everyone

[Haku]

I'm a little late to the party, but yeah, I would pay off all the credit cards first. That way, they can double as a temporary emergency fund until you get a real one saved up. Not everyone agrees with this approach, and that's fine, but hey, unless you have a REAL emergency, one shouldn't be touching emergency funds anyway.

After that, I would focus on knocking down those back taxes.

However, please look into your 401k immediately! Your employer could be matching funds, and you do NOT want to pass this up!

As for your credit union's Share Certificates, I think they're referring to CDs (Certificates of Deposit). I wouldn't worry about that right away. You want to build up a healthy reserve of ~6 months in emergency fund first. After that, if you'd like to invest, I recommend looking into an IRA.

Max out your EF, 401k, and IRA first. If you got more money to spare after that, come back and we'll talk some more.

[Ima saver]

I agree with Haku. Pay off your credit card and put it away. Never charge unless you can pay it off in full Then pay your taxes. Start up an emergency fund. It should be 3 to 6 months of living expenses in your emergency fund.
Fund your 401 at work. Next look into opening a Roth Ira with a good mutual fund family. I reccommend the Vanguard group, open a total stock market or Index 500 fund at Vanguard.

[boefixepa]

I agree! You've gotten some great advice. If you were like me I thought I knew and understood what a Budget was....I was wrong! So my first advice to anyone starting out is to really understand what a budget is and how to live within it.

The lightbuld moment for me was when I really comprehended that the amount of money in my checking account had absoluetly NOTHING to do with my Budget. They were two separate beasts. Since then...my average monthly balance has always increased and I've never had to go into my overdraft again....It was a real enlightening moment.

You've gotten some good tips on reading....follow them. I'd add Money 4 Life and Debt Free Living. If you want to look into reprogramming your brain (aka attitude or perspective) I'd recommend 'The complete Tightwad Gazette.'

A new favorite quote (which comes from 'My Year Without Spending) is praphased..

"A fantasy becomes a dissatisfaction with your current situation. Dissatisfaction becomes a desire. A desire a want. A want a need. A need a matter of life and death."

This mental path works for more than just spending...it's human nature. I should add it my profile or something.

You've taken the biggest step so far...you've acknowledged a need and are willing to, and working to change it....CONGRATULATIONS!!!

[Ima saver]

What has always helped me, is the envelope method. I don't just put the money in my checking account and hope it is enough to pay bills.
I divide my budget into 4 weeks a month. Each week, I put 1/4 of the amount for each bill (elec., water, garbage, car payment, property taxes, insurance, food, etc.) into those envelopes. When I sit down to pay the bills, I take the money out of the envelopes and put it into my checking account! ( I keep a few extra dollars in there in case I make an error)

[JoyJoy]

A good website to go to regarding debt and getting back on your feet again is http://www.ihatedebt.com/RadioShow You can even listen to the broadcasts there. I found it very helpful and still do.

Good luck to you!