Argggg! Starting over at 45... HELP!

[giovannicaldo]

Hi, I am new to this site and very happy to have found a place for someone like me to get help.

I am 45, with two kids 10 and 13. I have lost everything in the divorce (Filed cptr 13 Bankruptsy, and forclosure, spent all savings, etc.) I am renting a small apartment that is perfect for me and my kids. I owe over $8000.00 in taxes and have set up a monthly payment plan with both state and IRS.

Now what? I have no saving, so I need to start an emergency saving account.
I dont have any debt except the taxes which both are chaging me interest and penalty every month. OUCH!

I make around $40,000 a year and want to get a second job to help pay off my bankruptsy and taxes.

What should I do as far as planning? Pay off taxes before saving?

Any advise for me would be welcomed.

Thanks,

[flyfishnevada]

Pay off the taxes! My father in law died last year and hadn't paid the IRS for 4 years and Oregon for 14 years. His estate shrunk fast and the interest and penalties were all most as much as the taxes he owed. I think using a credit card, if you have one, would be a better option for emergencies than paying less to the tax man and saving. the interest and penalties would cost you much more that the CC interest. Pay that off as fast as you can to avoid further interest and/or penalties.

Other than that, live below your means as much as possible. No cable, shop at Wal-Mart and grocery outlets. Hit thrift stores and garage sales. You're not going to ruin your kids and they might learn some valuable lessons. As soon as you can, start saving and building again. If you want to retire at some point before SS kicks in and all that, revise your expectations and enjoy what you can.

And good luck! You found a good group of peeps on this forum.

[tryan]

Start with "pay your self first" ... set asside 10-15% of your gross and ignore all temtations to SPENT IT.

PS. How'd your EX make out in the divorce?

[Animorph]

What's the interest rate on your tax debt? That might determine if paying it off early is worth it or not.

Is a 401k/403b available to you? Any matching funds available?

I'd go for a good emergency fund first, then the debt, while still making debt payments. Pick up matching funds in your 401k by the end of the year if available. Otherwise for the near term couple of years a Roth IRA might be better, since you can withdraw contributions (but not gains) penalty free. That gives you better flexibility.

[Midpack]

May set you back a few years, but a lot of people don't get serious about FI until about 40, and still manage to reach it before 65, some even well before. Welcome, and best of luck...

[giovannicaldo]

Quote:

Originally Posted by Animorph What's the interest rate on your tax debt? That might determine if paying it off early is worth it or not. Is a 401k/403b available to you? Any matching funds available? I'd go for a good emergency fund first, then the debt, while still making debt payments. Pick up matching funds in your 401k by the end of the year if available. Otherwise for the near term couple of years a Roth IRA might be better, since you can withdraw contributions (but not gains) penalty free. That gives you better flexibility.

I have the following…
DEBT…
Chpt 13 Bankruptcy (11months left) $400.00 a month
IRS Taxes $6200.00 @at 3% and penalty of 1/2% of balance = $250.00 a month
State Taxes $2065.00 @at 5% = $150.00
ASSETS…
Cash in mattress $5000.00
EE and I Savings Bond (Matured) $4500.00
Employee Pension $60,000
403b Savings $0.00
457 account $0.00
ROTH IRA $0.00

[Animorph]

Quote:

Originally Posted by giovannicaldo I have the following… DEBT… Chpt 13 Bankruptcy (11months left) $400.00 a month IRS Taxes $6200.00 @at 3% and penalty of 1/2% of balance = $250.00 a month State Taxes $2065.00 @at 5% = $150.00 ASSETS… Cash in mattress $5000.00 EE and I Savings Bond (Matured) $4500.00 Employee Pension $60,000 403b Savings $0.00 457 account $0.00 ROTH IRA $0.00

So you have a 403b option? Any matching funds for your contributions? Get any match first, though you should be able to do it later in the year.

Cash/bonds look pretty decent as an emergency fund right now.

That's 1/2% each month for the IRS? That's a serious interest rate, over 9% in total with the 3% added on. If you feel comfortable that your job is secure, I'd pay off at least the $4500 bond value, and up to all $6200 of it as soon as possible. That frees up $250/month that should go back into savings for emergencies, but frees you from the highest interest you're paying now.

Pay off the state tax next, while still maintaining a semi-comfortable emergency fund. 5% is more than your cash is making right now, so again I wouldn't mind reserving just the $5k in cash for short-term emergencies if your job is secure.

After that, fill out the emergency fund to a more comfortable level. I would use a Roth IRA for some of that, the part you would only need if you lost your job for example.

I'm no expert, but that seems like what I would do in your situation.

[pb4uski]

I think I would view the cash and savings bonds as my emergency fund and focus cash flow towards living expenses and making the scheduled debt payments, and make additional payments to the state taxes bearing 5% if you can.

I assume that there is not match on the 403b, but restart that once you can, particularly if you think you can earn more than the 3-1/2% you are paying to the IRS. But if it makes you sleep better at night to pay off the IRS first and then do the 403b, by all means do so.

[pb4uski]

If Animorph is right and the IRS is 3% per annum plus 1/2% per month, then they should definitely come first. I would even consider using the cash and savings bonds to pay them off in that case, but only if you feel secure in your job or your prospects to find work if you were laid off.

[BigMoneyJim]

Overall vision: decreasing expenses is often easier than increasing income. I was able to get a smaller, older car and sell my newer truck for a lower monthly cost *and* lower total expense. I also was able to consolidate my debt for lower interest with a relative.

"Pay yourself first" is a nice idea, but I'm not sure it means you should save before paying off 9% interest debt, especially since the IRS can and does garnish wages.

I got by without much of an emergency fund while paying down my debt, but I don't have any dependents besides myself, so I may be missing something. A credit card can be an emergency fund. It's not ideal, but neither is owing the IRS money.

My general thoughts: If you have a 401(k) of 403(b) with company match and expect to be there long enough to vest, contribute enough to get the match. Control expenses and pay down the debt aggressively. Credit card for emergency expenses like car breakdowns.

It took me 5 years to pay down about $30k, or more fairly $20k in credit card debt and handled the $10k truck loan by selling the truck, getting a cheaper car and paying it off within the 5 years, too. It might take you longer since you're providing for three, but you can eventually get there.

It may not be much of a comfort, but now that I have no debt (besides the mortgage) and have some savings, I fret more over money because when I was in debt I always knew what to do with money: pay down the debt.

[lemming]

Do you have custody of your kids? Are you eligible for the earned income credit.?
At your salary range with dependents your tax rate should be pretty low. But how did you get into a tax bind in the first place. Don't make your withholdings so low that you do it again.
Check out the credit =make sure you are not double claiming the kids with your ex.
Earned Income Credit: What is the Earned Income Tax Credit?

[MichaelB]

The penalty of 0.5% is not an interest charge, it is a one time calculation made when the repayment begins and added to the outstanding taxes. I would say giovannicaldo is on the right track. Keep an emergency fund, make the monthly payments, keep expenses low. Once the loans are fully paid he can revisit the emergency fund to see how much he needs.

If income increases and some free money shows up, start contributing to the 403(b) if there is an employer contribution. He has a matured savings bond. Perhaps someone knows how those work and what options he has.

[flyfishnevada]

I suggested the taxes because they don't mess around. We know from my FIL's issues. No one else has the gun to head, so to speak, that the government does. It's all important though. Emergency fund, retirement savings, debt pay-off, etc. In any case, everything you pay off makes paying off the next thing and saving money that much easier...as long as you don't spend it on new stuff/debt.

[mystang52]

I think having a clean slate reaps intangible benefits (like less stress) so if you had $8265 I'd suggest paying off the debt. But since you don't you can at least pay off the State debt.
I suggest cashing in enough Bonds to pay off the State - that's one less debt you have, and further you get rid of that higher interest rate charge. Then, replenish your savings by $150 per month...or apply the $150 to your IRS debt.

[mystang52]

Edit to my previous reply. I see that between Cash and Bonds you do have enough to pay off the tax debts. I know it can be scary to cash in so much to pay off the debts, but think about the load lifted off your shoulders once those loans are paid.
You can then pay yourself back @400/month but without the stress of wing Uncle Sam and Mr. Governor. You have many years to get a solid financial footing, so my vote is to pay off the debt.

[Ed_The_Gypsy]

Quote:

Originally Posted by mystang52 Edit to my previous reply. I see that between Cash and Bonds you do have enough to pay off the tax debts. I know it can be scary to cash in so much to pay off the debts, but think about the load lifted off your shoulders once those loans are paid. You can then pay yourself back @400/month but without the stress of wing Uncle Sam and Mr. Governor. You have many years to get a solid financial footing, so my vote is to pay off the debt.

+1
Mike's suggestion is more rational, but this is what I would do.

[Coolius]

I support the advice to pay off the debt. You get rid of the oppressive taxes, plus regain peace of mind and not having to worry about the next installment, etc.

Once the debt load is removed, you can then consider the 403b options and pay yourself first options in a much less pressurized environment.

[Finance Dave]

I'd give Dave Ramsey a call to get motivated...maybe get his book Total Money Makeover (no, I'm not affiliated with his business in any way). Basically you need to focus on keeping your spending low, and try to increase your income over time.

I'm very sorry about the divorce, I know they can be ugly. Work hard on a plan for a few years and you'll make big progress. And by LBYM, you'll set a wonderful example for your children.

Good luck.

[giovannicaldo]

Hi, I have decided to pay off the debt using the EE bonds. I will leave the I bond alone because they are paying 6% return.

I really want to thank everyone who gave me advise, it cleared a few things up for me and is good to know there is life at the end of the tunnel.

Gio