17 Essential Financial Preparedness Tips
How would you handle a sudden financial emergency?
Every physical disaster has a financial cost. According to the National Oceanic and Atmospheric Administration’s National Centers for Environmental Information (NCEI), “The U.S. has sustained 279 weather and climate disasters since 1980 where overall damages/costs reached or exceeded $1 billion…”
However, it doesn’t take a physical disaster to have a financial one. The truth is that financial emergencies can strike at any time. That’s why it is so important to be prepared.
Unfortunately, financial preparedness is an often overlooked aspect of emergency planning. That’s why I’ve put together some specific financial preparedness tips that will help you minimize the financial impact of unexpected events.
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What Is Financial Preparedness?
In a nutshell, financial preparedness is your financial emergency plan. Most disasters come with a cost, both physical and financial. And the financial impact of a disaster can be significant.
However, it’s about more than just financial preparedness for disasters. It’s also about being financially prepared for life’s surprises. A job loss, car accident, or sudden medical procedure can all have a big impact on a family’s finances.
How Can I Have Cash When I Need It?
1. Sign Up For Direct Deposit
Signing up for direct deposit on all your income sources is an easy financial emergency preparedness move you can make to protect yourself. Even after a disaster, you will still be responsible for paying all your bills. However, payments by check could be seriously disrupted. Direct deposit ensures that the money will still get into your account on time.
2. Keep Some Extra Cash In Your Wallet
You never know when you will need some extra cash on hand. Keep a few extra twenty-dollar bills hidden in your purse or wallet. If you don’t see it, you won’t spend it, and it will be there when you need it.
3. Store Some Cash In Your Home
Keep a few hundred dollars in small bills in a safe place inside your home. After a disaster, ATMs and credit card processing may not function. Having some cash available gives you the flexibility to get what you need.
4. Build A Starter Emergency Fund
A Federal Reserve survey found that almost 40% of Americans would have a hard time covering an unexpected $400 expense. Think of an emergency fund as emergency insurance for life’s little bumps.
Start by saving $1000 and then gradually add to it over time. A thousand dollars won’t deal with every financial emergency, but it will take care of the little ones.
5. Build Your Cash Reserves
Once you have your $1000 starter emergency fund, your next goal is to grow your emergency savings into a fully-funded emergency fund.
Aim to save between 3-6 months’ worth of your household expenses. Keep the money in an insured savings or money market account that you can easily access in an emergency.
What Insurance Should I Get?
Sometimes it feels like insurance is actually designed to be confusing for consumers. But at the end of the day, insurance is simply risk management.
You pay an insurance company a premium. In exchange, they accept a portion of your risk. The amount of risk that you transfer is defined in your policy through deductibles and coverage limits.
Thinking about insurance this way can help you become a savvier consumer.
While insurance is an important part of a complete financial plan, I’m not recommending that everyone needs every type of insurance I’ve listed below. But, I do strongly suggest that you consider each type. Then, you can decide which ones fit your financial situation.
6. Buy Life Insurance
Life insurance is an essential part of protecting your family financially and a key part of any financial emergency plan. That’s why it’s so unfortunate that the life insurance industry is filled with gimmicks and manipulative sales tactics. This creates confusion for consumers.
However, you can still get quality insurance for a good price if you go into the process knowing what you want. So, here are a few of my rules for buying life insurance:
- If anyone else depends on your income, then you should have life insurance.
- For a stay-at-home parent, consider the value they provide in the home and through childcare as their income.
- If no one else depends on you at this time, then you do NOT need life insurance.
- At a minimum, you want a policy worth 10-12 times your annual income.
- Look for a duration long enough for your children to become adults.
- While many employers offer life insurance as a benefit, don’t count on this unless you own it and take it with you. Otherwise, purchase your own insurance outside of work.
- I recommend term life insurance. It is the most cost-effective version of life insurance.
- Do not buy any insurance that has an “investment” or “savings” component. You will get the best deal when you use insurance companies only to insure and leave your investing to investment accounts.
- If you have health issues, you should shop around as different companies can price the same health conditions differently.
7. Get Property Insurance
Anyone with a mortgage should be familiar with homeowner’s insurance. Banks require it as part of the mortgage process. This insurance provides financial protection for damage to your home and personal belongings. And, it also provides liability coverage for accidents on your property.
However, many homeowners may be surprised to discover what their insurance does not cover. It is very common for homeowner’s insurance to exclude damage from natural disasters like floods and earthquakes. These usually require special riders or companion policies.
Additionally, there are often limits on coverage for items like electronics, jewelry, and firearms without additional riders. If you currently own a home, it is a good idea to review your homeowner’s insurance and make sure that you have the appropriate coverage for your situation.
Designed for those who rent instead of own, renters insurance protects your personal belongings. Typically, they will also provide you with some liability coverage as well. Since it is not insuring against damage to the structure, it is considerably less expensive than homeowner’s insurance.
Unfortunately, only 37% of renders have a renter’s insurance policy. Many renters may erroneously believe that their landlord’s policy will cover them for a loss. However, this is not true.
As with homeowner’s insurance, there may be limits on coverage for certain natural disasters or certain types of items without additional riders or companion policies. If you are a renter, consider purchasing renters insurance to protect your personal possessions.
8. Find Disability Insurance
According to the Social Security Administration, your chances of becoming disabled are about 3 times higher than your chance of dying. For this reason, it is worth considering disability insurance as part of your financial emergency plan. This type of insurance replaces some of your income if you become disabled.
There are two main types of disability insurance.
Short-term disability covers you for several weeks after a waiting period measured in days if you cannot work due to illness or an accident.
Long-term disability, on the other hand, requires a waiting period of several months and then covers you for a number of years.
Unfortunately, affordable disability coverage can sometimes be difficult to find on your own. Many businesses provide this type of coverage as an employee benefit. And, sometimes, you can get a good deal when you purchase it with a life insurance policy.
However you go about it, it’s a good idea to have disability insurance if you can get it.
9. Purchase Health Insurance
Health insurance and the healthcare system, in general, can be a contentious issue. However, I believe that most people can agree that the spiraling cost of healthcare is concerning. But, you might wonder how health care relates to financial emergency preparedness.
According to CNBC, it is unfortunate that medical expenses cause most personal bankruptcies in America. Because of this, I recommend purchasing health insurance if you can. I believe it is worth it, even if you prioritize it over other expenses to afford it.
One option I like for lowering health insurance costs is a high-deductible health plan. This type of plan usually offers lower monthly premiums than an HMO but allows you to select providers like a PPO.
The catch is that you are responsible for all the costs until you reach your yearly deductible (which is usually in the $3000-$7000 range). However, this type of plan can be a great option to lower costs for both those who rarely go to the doctor and those who use many healthcare services.
10. Review Your Auto Insurance
While most states require some automobile insurance, there are still many drivers who are either uninsured or under-insured. According to Forbes, a driver should expect to be in three to four crashes over their driving lifetime.
When accidents do happen, you want to minimize the impact on your family’s finances. This means reviewing your policy to make sure you are comfortable with your coverage limits.
At a minimum, I suggest having very good liability coverage for accidents you cause (including medical payments). After that, you can choose how you want to cover your own car. Choose coverage based on your financial situation and how comfortable you are covering the cost of repair or replacement.
11. Consider Umbrella Insurance
Umbrella insurance is personal liability insurance designed to cover you if your liability exceeds your other insurance policies’ coverage.
If you have significant assets or work in an occupation with significant liability risk, then umbrella insurance may be a good fit for you.
The good thing about umbrella insurance is that it is usually fairly inexpensive. But it does require your other policies to have certain coverage limits. It is often sold as a companion to your auto insurance. So, if you want to add this coverage, you should start with your auto insurance company.
What Estate Planning Do I Need?
12. Write A Will
No one enjoys thinking about death. However, creating a will is one of the most important things you can do for your family and should be part of everyone’s financial preparedness plan. A will is your opportunity to express your wishes so your loved ones don’t have to agonize over deciding for you.
Unfortunately, an AARP survey found that 60% of Americans do not have a will. But making a will does not have to be difficult or expensive. In fact, there are many options available, from full-service law firms to self-directed websites like LegalZoom that can cater to your level of need. And, if you already have a will, make sure to review and revise it as your life situation changes.
13. Assign A Guardian
If you are the parent of minor children, then your estate plan must name a guardian for your children. This important decision should not be left up to others.
14. Make An Advanced Healthcare Directive
An advanced healthcare directive (also known as a living will, personal directive, advance directive, medical directive, or advance decision) is a legal document where you specify your healthcare wishes in the event you are no longer able to make them yourself.
Usually included in this is a power of attorney for healthcare. This is a document in which you designate someone else to make your healthcare decisions if you are unable.
How Can I Organize My Finances?
15. Organize Your Documents
All your financial preparation is useless if no one else can find the information when they need it. Simplify life for yourself and your family by organizing all your financial documents.
- Scan or make photocopies of all your important documents and store them together in a binder or folder in your home.
- Include social security cards, passports, birth certificates, marriage certificates, death certificates, divorce decrees, deeds to property, car titles, life insurance policies, wills, and any other government or estate planning documents.
- Collect all the originals and store those in a safe deposit box or a fireproof safe in your home.
- If you choose a safe deposit box, then make sure all the adults in your household are authorized to access the box. I’d also suggest including a trusted relative or family friend on this list as well.
- Create a list of all checking accounts, savings accounts, investment accounts, and insurance policies, along with the institution name, account numbers, and contact numbers. Add this list to the folder or binder that you are building.
- Once a year, scan or photocopy all the cards in your wallet or purse and store that too.
- Include a copy of your family’s home emergency plan in your binder as well.
- Make sure everyone in your house knows where you are keeping this information.
- Consider storing a second copy in your home emergency kit.
How Can I Reduce Expenses?
16. Eliminate Consumer Debt
Eliminating your consumer debt (non-mortgage debt) from credit cards, automobiles, and student loans will have a powerful impact on your family’s finances and peace of mind. According to a study by Experian, the average American family carries $90,460 in consumer debt. Eliminating this debt eliminates financial risk. This, in turn, significantly minimizes the financial impact of life’s ups and downs. And having no financial risk is a great financial emergency plan.
17. Pay off Your Mortgage
The only thing better than having no consumer debt is having no debt at all. By paying off your mortgage and becoming debt-free, you supercharge your income while eliminating almost all the financial risk from your life. This is the pinnacle of financial emergency preparedness.
How Can I Be More Prepared?
Make Sure You Are Ready For Anything!
We’ve reviewed some of the most important aspects of financial preparedness. Over time, I will continue exploring this topic more in-depth. If you’re interested in getting started on any of these items, you can start with my recommendation page for Financial Preparedness Services.
Until then, the best way to keep yourself prepared for anything is to make sure you’ve got a good emergency plan and a solid emergency kit. Once you’ve done that, make sure to check the blog regularly for more great articles.