Ask SmartMoney: Help! I Have $30,000 in Debt!

QUESTION: My wife and I are struggling to pay down $30,000 in consumer and auto debt. Where should we go for help — a bank, insurance agent, mortgage broker, stock broker or an accountant?
— Bo Fisher, Houston

ANSWER: What you don't need right now is someone selling you a new mortgage, an insurance policy or a "chance of a lifetime" stock. But that's what you're likely to get if you turn to those sources for help with debt. Look instead for a good credit counselor. This industry has its share of creeps, so start with an agency that's approved by the U.S. Department of Justice and belongs to the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Avoid any firm that immediately pushes you into a debt-management program (a service that automates your payments to your lenders at presumably lower interest rates) or charges more than $25 for an initial consultation (many are free). Prefer to handle all this on your own? Money-management Web sites like www.mint.com or software like Quicken will help.

QUESTION: I'm struggling to find appropriate fixed-income investments. Is a laddering approach preferable to a mutual fund?
— Marty Marut, Flushing, N.Y.

ANSWER: That depends. A laddered bond portfolio offers a more predictable income stream. It works like this: You buy bonds with a range of maturities — say, one, two, five and 10 years — and as each bond matures, you cash it out and buy a new bond at the longest duration. With a ladder, you know exactly what is coming to you and when. Also, should interest rates rise, you can reinvest at the higher rates every time a bond matures.

Creating a bond ladder is easy if you're interested in buying only U.S. Treasurys, which you can do commission-free through www.treasurydirect.gov, and are willing to settle for their modest yields. But your ladder might become rickety without corporate bonds, munis or overseas exposure. You'll need at least $250,000, however, to get the diversity you need from individual bonds. That makes a mutual fund or exchange-traded fund more practical for most investors, says Lawrence Jones, senior mutual fund analyst with Morningstar. Of course, a fund lacks a maturity date and a fixed yield — you're getting a mix of yield and appreciation. If you go this route, look for funds with the freedom to invest in various types of bonds, like Pimco Total Return.

QUESTION: You don't hear much about preferred stocks in the business press. Are they too complex for the average investor?
— Jerry Grammas, Houston

ANSWER: Preferred stock, a sort of stock/bond hybrid, isn't quite rocket science, but it is tricky to understand. Technically, it's a stock that pays a fixed dividend, usually quarterly, and the income generated is either taxed as ordinary income or eligible for the lower 15 percent tax on qualified dividends, depending on the issue. Preferred shares tend to trade more like bonds than stock; they're even rated by Moody's and Standard & Poor's. Income-hungry investors like preferreds because of their generous yields. Goldman Sachs's preferred shares, for example, now have a 7.1 percent yield.

So what's not to like? For starters, companies usually issue preferred stock only when they need significant capital in a hurry, which these days means it's available predominantly from the beaten-down banks. And investors shouldn't look to preferred shares for equity appreciation, since prices tend to stay relatively flat. Also, unlike a bond, the coupon is not guaranteed, although a company must stop paying the dividend on its common stock before it discontinues its preferred-shares dividend. Companies reserve the right to buy back the stock at par anytime past the call date, usually after five years of issuance.

Bottom line? Sticking to traditional stocks and bonds is preferable for most.

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