Disaster Planning: Tips from a Financial Advisor

Super storms and natural disasters remind us that we need an emergency plan. This plan helps protect your most valuable assets when disaster strikes.

Financial planning usually means thinking about future expenses, like retirement or college tuition. It also involves creating savings and investment plans to reach these goals.

Recent events remind us that disaster planning is important. It is often overlooked in financial planning. However, it helps protect you, your family, and your assets during sudden emergencies.

Anticipating what might go wrong isn’t always a pleasant exercise. However, it can be helpful when you look at your fears. This means finding out where you and your family may be financially weak. Then, you can come up with ways to handle any possible financial or natural disasters.

Everyone needs a disaster plan and tools for managing risks. These will help you get through tough times or financial troubles. To understand what resources you need for a disaster, make a list. Write the risks on one side and the solutions on the other.

To reduce these risks, you could build up emergency funds. You should also check and improve your insurance coverage.

It is important to update key documents. Make sure you can access important paperwork and contact information. Finally, create an emergency plan.

Emergency funds

An emergency fund usually has three to 12 months of living expenses. This money should be immediately accessible. Immediately accessible means in a savings or money market account that you can withdraw from within 24 hours. Within this rule of thumb, your specific circumstances might mean a larger or smaller fund.

Think about what types of emergencies might happen. A retiree does not need to worry about losing a job. However, a family breadwinner does.

This is different if the breadwinner owns a business. In that case, there are different risks to consider. An executive with a stable job, a good salary, and a large emergency fund does not worry about money. However, a retiree with limited funds and increasing health care costs might.

Think about the recovery time for each emergency. This will help you decide how much to save in your emergency fund.

Natural disasters such as super storm Sandy can force victims to rely on their own savings for months until insurance policies pay off. A major car repair, on the other hand, could cost a couple of thousands of dollars, which is reasonable unless there isn’t much of an emergency fund at all. Long-term disability of a family breadwinner could wipe out savings.

Other factors to consider when deciding on the size of an emergency fund include job security, expenses, and whether a backup exists to the emergency fund. A two-income family may be able to get by with a smaller emergency fund than a one-income family. Families with less predictable expenses usually need a larger emergency fund than those with predictable expenses.

Other emergency resources

Besides emergency funds, there are other options when a financial emergency looms. In some cases, these resources should be considered as stopgap measures. In others, they can provide longer-term financial security. Consider the following:

Family assets 

If your family has money or your parents or grandparents own a lot of assets, you might get an inheritance. However, this depends on how your parents or grandparents feel about sharing their wealth with family.

If you might need this later, it’s wise to start a conversation. Make it clear that this isn’t a request for money. Instead, it’s about assuring that parents can help in an emergency.

Home equity

Once you’ve been in your home for a number of years, you’ve likely built up some home equity, unless you’ve already tapped that equity or live in an area where home values fell significantly. If home equity is available, it might be a good idea to open a line of credit for possible emergencies.

A line of credit can be a good backup plan and provide peace of mind since funds can usually be accessed quickly. However, accessing home equity will deplete a home’s value and it will have to be paid back.

Other assets

Look for other assets that you can sell or borrow against. These may include a vacation home, a boat, a coin collection, or jewelry. You can either sell these or borrow against them if needed. However, getting that cash may take time unless you sell at low prices.

Retirement plans

Borrowing from a retirement plan should be one of the last options considered. Retirement plans are meant to be vehicles for saving money, not a source for loans or emergency cash. If you must borrow against your retirement plan, be sure to review the terms for paying it back. Unpaid loans can turn into retirement plan withdrawals with penalties and fines if you run afoul of the rules.

Insurance coverage

Depending on your financial situation and assets, you likely have several different kinds of insurance coverage. Insurance is a relatively low cost method of transferring risk to a third party like an insurance company.

The first place to start is to examine the types of insurance available through your employer. Many companies offer health insurance as well as some type of life and disability insurance.

Check with your insurance agent regarding your other policies, which typically include car and homeowners insurance. It's a good idea to review your policies with your agent from time to time. This helps ensure you have enough coverage, especially if your financial situation has changed. Your insurance agent can also help you decide if you need additional life and disability coverage over and above what an employer provides.

If you don’t have an umbrella policy, consider one that can help protect against unforeseen liability claims. Long-term care insurance can help protect family assets in case extended nursing home care is needed in old age.

For those living near the water, a flood insurance policy is a good idea. Many consumers mistakenly believe that homeowner’s insurance covers floods, but that isn’t the case. The National Flood Insurance Program subsidizes all flood insurance, since insurance companies are wary of footing the bill. Although flood insurance is an expense in addition to homeowner’s insurance, it is worth it to protect what is one of your largest investments.

Emergency plans

In the case of a disaster, every family should have a plan that tells them where to meet and how to contact each other. Be sure to include phone numbers of relatives and friends that could be a good contact if family members get separated. Cell phone service may not always be available.

Prepare an emergency kit of important documents and possessions in case you have to pack and leave in a hurry. And don’t forget to consider back up care for your pets in case of an emergency.

A final word

Emergency planning might not be your favorite kind of financial planning. However, if you take time to address your fears, risks, and possible solutions, you will feel more ready if something happens. Consult with your financial advisor for help in creating your plan. They often have a number of resources and ideas that can help you protect your assets and your family in case disaster strikes.

Sources:

https://hmlink.co/reader.aspx?a=ar-disaster-planning-steps-for-guarding-your-assets

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information