Q. My wife and I have an unsecured loan for $20,000 at 7 percent with about $17,500 left on the balance that we used to pay off a lot of doctor bills and other things. We pay $400 a month on the loan. We have about 4 years left on the loan. We have about $6,000 in savings from selling my motorcycle and an income tax refund. We also have about $13,000 in my USAA growth and income mutual fund.

All this is our "just in case/fun" money.

Should I cash out the mutual fund and savings to pay off our debt and then take the extra $400+200 a month and reinvest it in the mutual fund? Or should I keep the money for "just in case."

The loan is our only real outstanding debt except for our Trailblazer and house payment.

---J.T., by e-mail


A. In an imaginary world of job security, the temptation to pay off a 7 percent loan with investment funds would be very great. You can't get a 7 percent return on your savings without substantial risk and getting a 7 percent return on common stocks over the next 4 years isn't a sure thing.

Protection against an uncertain world, however, is a real need. It is not a paranoid fantasy. One of the reasons more than a million people file for bankruptcy each year is that most of them assume the best and forget about everything else. Then they are surprised by illness, job loss, divorce, or any of the other calamities that are part of life.

The best measure of security is the answer to a single question. How long can you "hold out" if you have to pay your bills with your savings?

You can answer that question for yourself by figuring out your monthly spending--- your car and house payments, your loan payment, and your ongoing household expenses. Then divide that number into the total of your "just in case" money, $19,000. If your monthly expenses are $3,000, that means you have a reserve of a bit over 6 months. After that, you'll be having yard sales to pay the electric bill.

If you've got 6 months of expenses in reserve, that's good. It puts you way ahead of most Americans. A recent study by the Levy Economics Institute, for instance, found that nearly 42 percent of all American households were in "asset poverty." Their definition of Asset Poverty was that the family did not have enough in liquid financial assets to support itself for at least three months.


Q. In recent columns you have written about retirement in other states--- Florida, Arizona, Nevada--- but how about retiring in the great state of Texas? There have got to be some places in Texas where the cost of living is less than in the metropolitan areas and yet still offer adequate medical care within a nominal driving distance. Can you describe some towns where we might look for retirement?

  --B.A., by e-mail from Houston


A. Actually, the cost of living can vary substantially within any state. You can do "early exploration" work by using a website like www.homefair.com and using their salary calculator. It will help you compare the cost of living in different cities and towns.  It shows, for instance, that $50,000 in Houston can be replaced with $46,635 in San Antonio and $45,642 in San Marcos.

That isn't dramatic--- like only needing $45,606 in Mesa, Arizona to replace $100,000 of income in San Francisco--- but it's enough to make a lot of people think seriously about a retirement move. One of the reasons Texas is a "retirement destination" state is that its cost of living is low relative to both coasts.

Another thing to remember is that your cost of living declines by 15 to 20 percent when you stop working. This isn't because you consume less. It's the result of adjusting for changes in taxes, saving, and the costs of having a job. (More about that in an upcoming column.)