Dear Dr. Don,
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I've been unemployed since January. I've used up almost all my 401(k) money, covering living expenses. As a result, I owe the Internal Revenue Service $3,500 and have another $27,000 in credit card debt. I was forced to sell my house and was fortunate, in this market, to make a profit of $18,000. I'm planning on going back to school to secure a higher-paying job.
My question: Until I find employment, should I put the $18,000 in a certificate of deposit or some kind of interest-bearing account? This is all the money I have in the world, and I really don't want to spend it to cover day-to-day living expenses.
-- Regina Restart
If you owe the IRS $3,500 and have $27,000 in credit card debt, you've already spent the money. You're just in denial about where and when you'll need to spend that $18,000.
While I wouldn't advise you to use the $18,000 to pay off the credit card debt before figuring out how you're going to cover living expenses, it also doesn't make sense to pay 14% interest (or more) on your credit card balance over time while you have that money sitting in an interest-bearing account earning a fraction of that amount. Once you figure out your finances, either when you're going back to school or when you find work, you should decide how much money should be held as an emergency fund, or an account to pay for unexpected emergencies, and how much should go toward paying down the credit card debt.
Going back to school to train for a new career makes sense. It's already late in the season for federal financial aid, so you may need to complete the Free Application for Federal Student Aid, or FAFSA, form for the 2012-2013 school year. Some schools may still offer financial aid opportunities.
Don't just talk to the admissions office and the financial aid office of the schools you're considering. Talk to the placement office. Talk to recent graduates of that school, working in your field of study. You want to train for a career that you'll enjoy and to get that education at a school that can place you in that field.