A post-bankruptcy strategy to tackle debts

How should I stabilize my financial future? I am 44 years old and my wife is 38. She declared bankruptcy a year ago under her own name; I did a bankruptcy in 1997. We were able to buy a house in May with an adjustable-rate mortgage that has a 7.99 percent interest rate as a result of our credit. I can refinance in two years but would have to wait three years to avoid a 3 percent penalty. Our mortgage payment is $1,006 a month and will go up by $142 a month next year to reflect higher taxes. I owe about $10,000 in back child support, which I am paying off at a rate of $40 every two weeks. We have two 2004 cars; one loan has a $333 monthly payment and a 15.9 percent interest rate and the other a $327 monthly payment at 12.9 percent. I contribute 4 percent of my earnings to my 401(k) plan, which has an $11,000 balance, and I pay $86 a month in addition to repay two loans against the account. We have three credit card accounts, with our balances near the $3,800 combined limits. I earn $36,171 a year and my wife earns $28,704. I get some overtime and reimbursement for business use of my car, so our take-home pay works out to a little more than $4,000 a month. My wife has $6,000 in an IRA CD, which will be available in December, since she had it locked in for 24 months.

What bills should we pay off and in what order? There is no interest charge on the child support, but it affects my credit. My 401(k) loans affect my retirement.

J.J., Boston

With some discipline you can work your way out of this mess.

I tally that you have $1,958 in fixed monthly bills, plus the unspecified amount you owe for each of those three credit card accounts. Suppose the minimum required payments there come to $250 a month. That would bring the total of all of your fixed payments -- all of which represent payment of debt except $120 a month in new money for your 401(k) account -- to $2,258 a month. Since the precise amount of your monthly take-home pay is $4,008, that leaves you with $1,800 in cash each month to deal with all of your other expenses.

What you want to do now is figure out where that $1,800 has been going and where you can cut back on expenses. As you do that, work your way toward a budget -- so much for food, clothing, utility bills, etc.

Try to develop a budget that might come to $1,500 a month for predictable expenses. That would leave you with an extra $300 a month. You should then commit $50 a month of that sum to cash savings -- simply an emergency account so that you are less likely to be thrown by the unexpected -- and use $250 each month to work down the bills.

You don't specify the interest rates on your three credit card accounts, but given your credit profiles I'll bet they are healthy. If you are able to make $250 extra payments on these accounts -- and refrain from making further charges -- you could probably have these accounts paid down in less than 15 months. You could then start working away at the next most expensive debt, which is probably the 15.99 percent auto loan. And so on.

The trick in working out a budget is to be realistic. Don't figure that you can draw one that is so fierce that neither you nor your wife will be left without miscellaneous spending money.

A few other thoughts: Forget about your wife's IRA CD maturing in December. You will have to work your way out of your problems by living and spending more carefully, not by raiding her retirement assets.

And don't try speeding up payments on your 401(k) loans to improve your credit. Your credit is lousy and that won't cure it. Plus, the interest levied on those loans is going back into your 401(k) balance -- so you're effectively paying interest to yourself.

Finally, think more carefully about what you buy. Most people in your situation would have seen trouble coming before buying two new cars; used would have been better.

You anticipate higher future expenses for your home mortgage interest and taxes. I'm hoping you and your wife will earn raises in the interim to meet them. If not, redraw your budget to reflect the higher expenses, effectively slowing the pace of reducing your debt.

As a mid-term goal, strive to improve your situation sufficiently in three or four years so that you can refinance your mortgage with a fixed rate, which would make future planning a good deal easier and more certain.

Retirement plan has one land mine: no health policy

Our current income is approximately $30,000 a year from a small annuity due to expire in 14 years, plus our interest income. We have the following savings: $300,000 in IRA CDs, $254,424 in taxable checking, passbook savings, and CDs. We purchased a total of $195,000 in I-bonds in $5,000 denominations between 2000 and 2003, valued at about $225,000. I have a $12,000 mutual fund account, with investments divided between small- and mid-cap stocks. We own our home, which has a value of between $400,000 and $500,000. Our goal is to have growth in these accounts with low to moderate risk. Our ages are 62 and 58. Another small pension of about $10,000 annually will begin in 2007. We do not plan to apply for Social Security until I am 66, at which point I anticipate $19,000 annual benefits. We have no medical insurance.

M.J., Boothbay Harbor, Maine

You should be in good shape over the long haul, although it will require a little discipline to stay on course. But given your current portfolio, I can't really believe that you are interested in growth of your savings, even with the provision that it be achieved with ''low to moderate risk."

I estimated that you live on about $52,842 a year, adding an assumed $22,842 from interest to your $30,000 annuity. That was based on a guess that the return from your various savings accounts averages 3 percent. The question is whether that is a prudent amount to withdraw annually from your savings, providing that you will have to adjust your budget upward to compensate for future inflation.

I ran a calculation to determine what you might be able to withdraw from your total $761,424 savings pool over a 35-year time period, adjusting the withdrawals upward by 3.5 percent each year to offset future inflation. I assumed long-term investment returns of 5 percent, not because I think it likely that a leopard with 98.5 percent of savings in cash is likely to change its spots, but because I think returns on cash will be considerably higher over the long haul.

The answer came out at withdrawals beginning at a $27,492 annual level. So if my estimate of your current withdrawals from your investment accounts is correct, you are effectively ''saving" about $4,650 a year at this point. That is good, because your current primary source of income -- the annuity that will run to 2018, is not indexed for inflation, and presumably neither is the pension. While the Social Security income that will begin in 2008 will creep up to offset inflation, most seniors complain that the adjustments usually don't quite keep pace.

For those reasons, it is important that you carefully manage your finances during the years between 2007 and 2018 -- banking the extra cash that will come in during those years as a buffer for the effects of inflation on the annuity and pension income streams, and, to a lesser degree, on Social Security.

If you are only drawing income from your taxable accounts, allowing the IRA earnings to build within the account, you will have a lot more extra breathing room, based more on your lower expenditure level than on prospects for serious growth within your various savings accounts. If that's the case, I suggest that you use that money to purchase a long-term healthcare policy. The cost of these policies escalate each year as you get older, so now is the time to start.

I would also suggest that move even if you are currently withdrawing income from the IRAs, and even if it requires reworking your annual budget. There is nothing that can wreck a well-laid retirement plan such as yours as a catastrophic healthcare expense, and you simply don't have enough savings to effectively ''self-insure" against such a possibility.

Build your fixed-income accounts carefully, using the resources at www.bankrate.com to assure that you are getting the best possible rates on your CD accounts, and keeping your level of passbook savings to a minimum.

Kenneth Hooker can be reached at invest@globe.com or at The Boston Globe, P.O. Box 55819, Boston, MA 02205-5819.