Q. I am 29 and recently married. I adopted my wife's son and we have a child on the way. I also have $8,800 in credit card debt ($178 a month, 16.9 percent interest), $7,500 in an unsecured loan ($300 a month at 16.5 percent interest), $4,000 in school loans presently in forbearance but accumulating interest at 7.75 percent, and $2,000 in debt from my wife's earlier divorce.

We also pay $320 a month for our car and $475 a month in daycare. We rent an apartment at $650 a month. I make $34,000 a year and my wife just started a job making $26,000 a year. I have a great 401k plan at my job but I have contributed minimally since I started working in 1996. I have only $4,200 in the plan. I am now contributing at 3 percent of my paycheck.

I just rolled over a $100,000 term life policy into a variable annuity life policy and it is invested in two aggressive growth funds from Janus and Fidelity ($50 a month). My wife's' credit is bad due to a bad divorce and mine is so-so due to a few late payments on credit cards.

Should I continue to contribute to the 401k or should I pump all available income into paying off our debt? Did I make a mistake buying the variable life insurance? I would like to get a house, but I'm afraid that my debt to income ratio and credit would hinder me as well as the difficulty of saving the down payment. Any suggestions?

---J.C., Dallas, TX


A. Do you have a lifeboat? If your new wife continues to work you've got a chance but any interruption in her income could easily put you into personal bankruptcy. The situation is that serious. Your three loan payments total $798 a month or 28 percent of your pre-tax income and 16 percent of your combined income. And that's without considering the invisible burden of the student loans and old legal debt, $6,000.

The first action you should take is to drop the variable life insurance policy and go back to a term life policy. Term life gives the most protection for the buck and you shouldn't be looking at variable life until you have maxed out on your 401k plan. If your 401k plan has a really good match--- like 100 percent on the first 3 percent of salary--- I'd be very reluctant to give it up.

After that, get on the web and use the debt reduction planner on the Quicken.com site. It will give you and idea of how long it will take and what you may need to do to get out from under.

If you're serious about buying a house, start to acknowledging that it is a long term plan and set some interim goals like which debt you'll pay off first. The good news is that you'll have more than enough time to get your late-pays far behind you.


Q. I'm 72 and have invested aggressively in individual stocks and mutual funds. I advised my stockbroker that I wanted to gradually shift to more conservative investments. I thought high-grade corporate bonds. He thought and we bought $50,000 of short-term preferred shares. They were priced a few dollars under par and callable in about three years. This is the first of four steps to get about $200,000 into income producing investments.

My question: In the past, when the market tanks and stays down for a while, how do preferred stocks behave?

---G.W., Denton, TX


A. With high quality corporate issues now yielding a substantial premium to Treasury obligations you and your broker have made a good income choice. Within broad limits, preferred shares are more influenced by changes in interest rates than by changes in the stock market. If interest rates rise, the value of preferred shares will fall; if interest rates fall, the value of preferred shares would rise.

The limit here is the financial condition of the company that issues the preferred shares. If the company becomes "credit impaired" investors will see its preferred shares as a poorer risk and will demand a higher yield to compensate for the added risk. The shares could fall in value.

Because of these risk factors, preferred shares can definitely be "too much of a good thing." I'd limit them to only a portion of your portfolio.