Do I Invest or Pay Off Debt?
Dear Dave,
I’m in my early 20s and have heard you talk about the importance of investing money early. The earlier the better. I’ve got a student loan, a personal loan and a car payment equaling around $20,000. I’ve started the baby steps you suggest. I’ve got a $1,000 emergency fund in the bank. I’m budgeting and using the envelope system. However, after making the minimum payments, I’ve got around $150 left over each month. Should I go ahead and start an investment program with that money?
Robert
Houston, Tex.
Dear Robert,
Investing early is very important, but you’re trying to short-circuit the process. Follow the baby steps in order. Baby step one is $1,000 baby emergency fund you said you’ve already got. Baby step two is get out of debt using the debt snowball. List all of your debts smallest to largest and apply that extra $150 a month you have to your payments on the smallest debt. When you pay that off, roll the payment you were making on that debt, plus the extra $150 into your second smallest debt. Only when you’ve finished paying off your debts do you start investing. If you follow the baby steps, in the right order, you’ll get out of debt faster and then have a lot more money to invest. I believe in investing as early as you can start, but only when you’re at the proper place in the baby steps plan.
Dave
Should Business Apply for Tax Relief?
Dear Dave,
We’ve got a small business and we’ve fallen behind in paying our taxes. The government has put a levy on our checking account and on our accounts receivables. A company has contacted us about filing an OIC that would let us pay the back taxes at more than 90 percent off and clear this up. The cost is $2,500 up front. Is this a good idea? We’re getting desperate.
Dawn
Phoenix, Ariz.
Dear Dawn,
Don’t do it! I can’t make it any clearer than this. The company that contacted you is more than likely offering to “teach” you how to apply for an Offer in Compromise. This is an agreement with the government for you to pay a portion of your taxes to settle the debt. Your chances of the government approving an OIC are zero-to-none. The government will only approve an Offer in Compromise if you’ve got virtually no assets and no income. Since you own a business, I’m guessing you’ve got both.
An OIC is the government’s last chance to collect anything if they have no other alternative. They’ve got alternatives with you. Should you hire this firm, you’ll be out $2,500 and still have the tax problem.
The best thing you can do is to get on a budget, control your expenses and pay everything you can on these taxes to clean up this mess. For more information on OIC’s see a real tax attorney or visit the IRS website at www.irs.gov.
Dave
(Note: Names may be changed to protect individual identities.)
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