Digging Out of Debt
Magazine Money

Digging Out of Debt

Photo by Zave Smith

Get life insurance and an estate plan. McKinley has life insurance through his employer, in which $8.40 is deducted from his paycheck per pay period. Akbar suggests that McKinley obtain term life insurance to protect his two children. Term insurance will allow McKinley to obtain a higher level of death benefit with less impact on his budget. This is especially important since his 6-year-old son has special needs. He should work with an insurance professional to determine the amount and length of the term contract. McKinley should also have a will prepared by an attorney and explore a supplemental needs trust for his son with special needs. Life insurance can be used as a funding vehicle for this trust. He should also look into long-term disability since there is no employer-provided long-term disability benefit. This will protect his earnings and savings in the event of a prolonged disability.

Plan for his children’s education. McKinley has two sons, ages 6 and 16 (for which he pays $668 a month in child support). Once he has adequately addressed savings, retirement, life insurance, and develops an estate plan, he can consider utilizing a 529 plan to save for his youngest son’s education. The 529 consists of after-tax contributions, but offers tax-free growth and tax-free withdrawals for qualified educational purposes. Since his oldest is just two years shy of enrolling in college, be recommends that he apply for grants and scholarships. He should also consider staying in state, since local colleges generally have lower tuition and fees for residents.

Monitor credit annually. After closing four of his five credit cards, McKinley’s FICO score took a huge hit. be suggests he get a copy of his credit report from the three national credit reporting agencies every 12 months at www.annualcreditreport.com. Make sure that the information in the report is accurate and up to date. Any errors should be addressed with the Federal Trade Commission. He should beware of credit repair scams and use resources such as the Federal Trade commission’s site to learn how to improve his creditworthiness and to find legitimate resources for low or no-cost help (ftc.gov/credit).