First of all you should make sure your AVG virus definitions are up to date otherwise it won't recognise some of the newer virus's. Also if you use AVG Free I don't think it detects spyware, try getting an anti-spyware aswell there are some free ones search google.
If you re install windows that's fine, but it will get in the same position again if you don't maintain it properly.
You really should:
Remove old unused programs
Remove unwanted files to free up HDD space
Defrag the HDD (I prefer defraggler rather than the windows defrager)
Run disk cleanup
just doing these few things alone can really help keep your pc running smoother, if you don't know how to do them you can easily look them up in google as it will be good for you to learn anyway.
If you want to start again from scratch, you need an XP cd, make sure you have the XP Product key before you do anything, you will need drivers for your hardware e.g. graphics card, network card, wireless network card, usb controllers etc...
It is best to plan these thing's in advance otherwise you could be stuck with a computer unable to connect to the internet and with poor graphic quality and your dad would then notice.
Also don't forget windows have a certain amount of times they will let you use your product key, even though you own it... You will then have to ring them up and explain why you have exceeded this amount, which will show on your phone bill, so I would check up how many times you have used it too.
The best thing to do is delete the partition completely and format the whole drive.
Back up all the data you want first otherwise you will lose it.
Sorry it is not in more detail I don't have to time to go into it much more. Do some more research in google first and learn a little bit about it. There will be some helpful guides for you to read about somewhere.
Edit-
I agree norton was never a good anti-virus for me, whereas AVG was fine, just a bit slow :(, if you do as suggested and install windows 7 (do not get vista 0_o, because then you will see what a slow pc really is :/) don't use Mcafe, there are problems (unless they have now been fixed) that cause blue screen of death every 10 minutes or so which is not very fun.