If you want to get in control of your finances, you need to know where your money is going. Of course, you need to track your spending so you don’t blow your paycheck each month. You also need to know how much of your money you should be saving for the future.
But what about those circumstances where you’re not sure what happens to your money? No, not a Friday night when you’re out with friends and aren’t sure how you spent a couple hundred bucks.
Rather, it’s those major life events, tragic situations or other scenarios that you know could impact your finances but you’re not entirely clear how.
Read on to find out what happens to your money when…
You buy stock in a company that goes bankrupt
What happens to your investment in a company when the company goes bankrupt? “If you are a common stockholder, you are probably out of luck,” said Charles Read, CEO of online payroll service GetPayroll.
The company’s secured creditors are paid first. Then bondholders get paid.
“If there is anything left, which there is normally not, you may get a few cents on the dollar,” Read said. That’s why it’s important to diversify your portfolio rather than put all of your money into shares of a single company.
You win the lottery
Your chances of winning a big jackpot are slim. But if you do, you’ll obviously have a lot more money — and a big tax bill. Lottery winnings are taxed as income on the state and federal level, according to the Tax Foundation. Yet there’s another drawback to coming into that much money at once.
“You might have to reorganize your life,” said Carlos Dias Jr., founder of Excel Tax and Wealth Group, an Orlando, Fla., financial planning firm.
For example, you might need to set up a trust or corporation to receive the money to protect your identity, he said. And you might have to change your phone number to avoid being harassed by people who want a piece of your winnings.
You make loans to family
It can be a bad idea to loan money to family, because you might not get it back. Then your relationship with that family member could be damaged. However, there are other financial repercussions.
“In instances when you loan larger amounts of money, it’s important to charge interest and to sign a loan contract,” Jucoski said. “If you don’t, the IRS could deem loan amounts that exceed $ 14,000 a year a gift. You probably won’t owe the gift tax — which is 40 percent — if you don’t exceed the $ 5.49 million lifetime gift exemption amount.” However, the amount of the gift will go against your lifetime gift exemption.
Plus, if you have a signed loan contract and the loan isn’t repaid, you can claim a tax deduction for a non-business bad debt, Jucoski said. “Be sure to work with your legal advisor when drafting a loan contract to ensure you’re covered,” she said.