Q. I was recently laid off. I have roughly $17,000 in savings (not counting retirement). The only debt I have outside of current living expenses is a car loan. It has a balance of $11,000 (2 years remaining)

My question is this. Should I pay off the loan immediately and resign myself to possibly taking any position that allows me to stay afloat and pay the bills (current living expenses)?   Or should I use the $17,000 to allow me to be more selective in my job search and making the monthly car payment as if I were still employed?

---S.S., by e-mail

  

A. Quick job or slow, your real security will be reduced by paying off the car loan. The ultimate measure of security is your staying power--- how long you can go without earned income before you'll be forced to make major changes in how you live. By major changes I mean having to sell your house, etc.

You can understand how paying off the loan will reduce your security by going through a money supply analysis. Let's say your monthly expenses, excluding the car loan, are $1500. If you pay off the car loan you'll have only $6,000 in cash left. So your money supply will be gone in 4 months ($6,000/$1,500).

Now let's work it the other way. Add the car loan (about $490 a month) to your monthly expenses of $1,500 and you need $1,990 a month. At that rate your $17,000 will last 8.5 months--- more than twice as long.

A third alternative would be to sell or trade the car for a lower cost car. Suppose, for instance, that you had enough equity in your car to cover the up-front cost of leasing a new economy car for $200 a month. If you did that you'd still have your $17,000 and your monthly expenses would be $1,700 ($1,500+$200) so your money supply would last 10 months instead of 8.5 or 4. If your equity in the car exceeded the cost of getting into the new car, every $1,700 would buy you an additional month of search time.

If you had enough equity to buy a less expensive used car for cash your monthly expenses would be $1,500 and your $17,000 would last 11.3 months. Unfortunately, the rash of "$0 down and 0% interest" car deals has worked to depress used car values.   Most people have a lot less equity in their cars than they had before Detroit started offering no-interest bargains.  

  

Q. We unsatisfied with our current brokerage house. Our account contains about $75,000 in cash, $85,000 in CDs, $155,000 in tax-free bonds, and Putnam funds that have tanked. We also have six variable annuities, four of which were acquired prior to our current broker, with a total current value of about $938,000. All have matured except two.

The guaranteed death benefit has a value 50 percent greater than the annuity value so I can hardly withdraw the funds. Since I am 80 and probably a short-timer, any suggestions?

---W.B., by e-mail.

  

A. Let me offer a rough outline. You'll need a fee-only financial planner to work out the exact details. Here's the most important thing--- you can use the loss in the variable annuities to buy yourself a cheap life insurance policy.

How do you do this?

Easy. Check the death benefit details on each contract and withdraw as much money as possible while still keeping the contract in force. There is a good chance you will be able to liberate most of your $938,000 while retaining a death benefit of about $900,000.   Working out the details is why you should see a fee only financial planner. It will also keep you out of the hands of a "financial advisor" who derives 100 percent of his income from sales commissions. You can find a fee-only financial planner in your area by visiting their national website, www.napfa.org.

If you happen to have a sizeable gain in the variable annuities (unlikely, given the figures) you can do a 1035 exchange to a low cost variable annuity such as the one offered by Vanguard. If you don't have any gain in the variable annuities, you can remove your money with no tax consequences. If that is the case, I'd move it to a low cost provider like Vanguard so you can invest in their Admiral Class index funds.

With that done, you would then build a simple but diversified portfolio and live happily ever after, sans broker.