Spending severance pay to pay off mortgage

Dear Dr. Don,
Could you please suggest what to do? My wife and I were laid off two weeks ago. We got severance pay and benefits pay totaling $85,000. We recently bought a townhouse and owe $85,000 to a bank. My wife wants to pay off the mortgage, but I am against it because that would leave us without any money.

We both have 401(k) plans ($15,000), but we transferred this money into IRA rollover accounts. I am not comfortable with the idea of using this money to pay off the mortgage. I would prefer to put the $85,000 in a money market account and keep it there until we find new jobs.

Thanks for responding,
-- Boris

Dear Boris,
I'm with you on this one. Using the $85,000 to pay off the mortgage will leave you with no liquid funds. Liquidity is critical until you are able to find new jobs. While the monthly mortgage payment may be your biggest bill, paying off the mortgage doesn't leave you with money for utilities, groceries, etc.

Putting all of the money in a money market fund goes to the other extreme. You want enough liquidity to be able to pay your bills and meet your living expenses until you find new jobs, but you shouldn't need to keep the whole $85,000 in a money market mutual fund or a money market account. For money market accounts, you can find the highest yield in your market or nationwide using Bankrate's High Yield search.

You could put together a laddered CD portfolio of short-maturity CDs. I like to call this a step ladder, but a money market account offering a competitive interest rate will do nearly as well, if not better than, the step-laddered portfolio. You can learn how to ladder a CD portfolio by reading the Bankrate feature, CD ladder evens out rate cycles. Good luck to you and your spouse in finding new employment.