It's an unpredictable world, capable of changing immediately and bringing down the full force of the unexpected. The American Red Cross, the Office of Homeland Security and other organizations encourage everyone to prepare for potential disasters, such as tornadoes, hurricanes, and earthquakes. And it's a wonderful idea to store canned food, extra batteries, flashlights and other emergency supplies, just as it's a good idea to have a first-aid kit in your home and a road-side kit in your car. If disaster struck, we'd be prepared.
But what if financial disaster struck instead? Would you be prepared to weather a money storm? Instead of waiting for a financial disaster, I want to encourage you to prepare now, while your mind is calm and resources are readily available. You'll face the future knowing you've done everything you can to protect your family and yourself, and you'll probably sleep a little better at night, too.
First, make a list of possible financial disasters that could strike you and your family, and always assume the worst. For example:
What would you do if you or your spouse (or possibly even both of you) lost your job tomorrow?
If you became disabled?
If you were forced to take a pay cut?
If you're house was destroyed?
If a relative needed money?
If your car was wrecked and you needed a new one?
If you had unexpected medical or legal costs?
If you had to care for a sick relative, child or spouse?
If one of you should pass away?
While it's impossible to plan for every situation, it's possible to create Action Plans for most of them now, while you're thinking clearly and not under the strain of sudden shock or disaster. Second, dedicate an evening to sitting down with your family and writing down the steps that you would follow for the financial disasters you've listed, then put these plans away with your other important documents. Then, if financial disaster strikes, follow these plans.
In addition to creating financial Action Plans, the following steps should also be taken to secure your financial survival and your peace of mind.
Establish an emergency fund equal to 9 to 12 months of expenses. Financial experts urge everyone to maintain an emergency fund equal to 3 to 6 months' income. Unfortunately, in a bad economy, it might take longer to find another job, and I don't personally feel comfortable without at least one year's income in my emergency fund. Put this money into I-Bonds or CDs, put them into your safe, and forget about them. Money market and savings accounts make poor places to keep emergency funds. It's just too easy to access them for expenses that truly aren't emergencies. And remember that this fund is for large-scale financial disasters, such as job loss. This is not the fund you use to pay for car repairs or a new refrigerator. Create a separate "slush fund" for those smaller emergencies.
Make out your will. Be certain to include such related items as a living will, instructions for funeral arrangements, organ donation, guardianships and estates for dependents, medical power of attorney, etc. This is one area where ambiguity and/or unknowns can have devastating consequences. Are you single with no dependents? A will is still an important idea, as your assets might still end up in probate, no matter what your wishes.
Make copies of all important documents and keep them in a locked box in a location away from your home. In the event of a house fire or natural disaster, you'll be glad you did this. You'll still have to replace the originals if they are destroyed, but having copies will make the process easier.
Buy a fire and waterproof safe. Keep your documents safely stowed in a locked safe, and keep the safe out of sight. You should be able to pick up a nice one for less than $40.
Consider investing in a Roth IRA instead of a traditional IRA. While traditional IRAs offer potential tax deductions, contributions to a Roth IRA can be withdrawn without penalty in emergencies. Like the emergency fund above, your retirement plans should only be touched as a last resort. Before you withdraw money, ask yourself, "Will I lose my house or car if I don't withdraw this money?" Unless the answer is yes, don't do it.
Keep at least two credit card accounts open, and keep the available balance high. Normally, credit cards should not be used. However, in emergencies and as a last resort, credit cards might help you survive until you're back on your feet. And if a fire or natural disaster should destroy your home, you'll need those credit cards to rent a hotel room or car.
If you own your home, consider a home equity loan or line of credit. Using your home equity to pay bills is a last resort, but it might be able to help you in the short term. Also, if you're buying a home, consider checking into opening one of these when you secure your mortgage. Doing this might later save you hundreds of dollars in fees.
Take a home video. If you own a video camera or can borrow one (some digital cameras also have a movie mode and can take "movies" up to 5+ minutes), video tape your residence and your belongings, including the inside of all cabinets, closets, and storage areas. Keep this video in your safe. As you purchase new appliances, digital equipment, etc., add it to your film, and update the entire film every two years. If a fire or flood occurs, you'll need this for your insurance settlements.
Hopefully, financial disaster will never strike. But in the terrible event that it does, the planning that you do now will be invaluable. Put your mind at ease today by planning for tomorrow.
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