Financial Q&A: Readers' money questions answered

Q:

We have credit-card debt of approximately $3,700 and have been paying it off aggressively. But we have an aging car that needs to be replaced, and a baby due in December. We would like to have our debt paid off or close to paid off by November. To do that, we would like to use some of the $12,500 we have invested in mutual funds and a money market fund. Is this a bad idea? We don't have enough in our savings account to make much of a dent in the debt. We also have money in a thrift savings plan that we plan on using for retirement.

C.M., via e-mail

A: Everybody should have money set aside for emergencies, and Frank Boucher, a financial planner in Reston, Va., believes that your credit-card balance is an emergency. His advice: Use the money market fund first and convert the remaining funds to money market funds so that they are available for any additional emergencies.

"Try to build this up to equal three to six months' of living expenses," says Mr. Boucher. "Once you have done that, you can start investing again – perhaps add to your thrift savings plan or a 529 plan to pay for that new baby's education."

Q:

I'm 71, retired, and have a fixed income that is modest but more than enough to live on. Would it be advisable to pay off my $140,000 mortgage? I pay 6 percent on it. Average CDs are about 4.95 percent in the $100,000 range. I do have a small mutual fund worth $90,000 and a SEP account designed to last until age 86. We have been using our savings to supplement our monthly retirement activities.

R.R., via e-mail

A: If you have $140,000 in a taxable account (not a retirement account) and $140,000 in fixed-income securities (CDs, bonds) in your portfolio, then certified financial planner David Hulstrom, of Woodstock, Ga., believes you should probably pay off the mortgage. Essentially, going mortgage-free is a guaranteed investment similar to bonds but generally with a higher rate of return.

The more important question is probably how you'll feel about the decision. Some people are overjoyed to be free of any debt obligations. Others feel poor because their investment portfolios are smaller. In your case, you may have to make some lifestyle adjustments since you'll be drawing down your savings.