Protecting Your Finances from Disaster

Whether fire or flood, earthquake or hurricane, powerful forces of nature can lead to financial devastation if you and your home are in its path. But while you can’t stop a catastrophe from happening, you can take preventative measures. Doing so will cushion the blow such events can have on your personal finances.

Be adequately insured

Paying for insurance can feel like a waste of money during the good times - but if a disaster strikes, you’ll be grateful for your foresight. Having the right insurance will enable you to recoup and rebuild with the least amount of personal outlay. Take the time now to research the type of insurance products that are right for you.

Homeowners: A minimum of insurance is required if you own a home, but to ensure that you are fully covered, you may need to add to it. A guaranteed replacement cost policy would allow you to rebuild your house (even with improvements) at today’s prices. If your current policy does not cover the cost of meeting current building codes, consider paying a little extra for it. Homeowners insurance does not include flood damage; so if this is a concern for you, look into purchasing insurance that does. And if your home is in an earthquake prone area, you may want to pay for a policy that covers its damage.

Renters: Insurance is not required for renters, but it is highly recommended. Renters insurance typically pays for damaged, destroyed or stolen property. But for even greater security, consider a policy that will pay for the cost of a hotel if your home becomes uninhabitable. Renters insurance is usually inexpensive, and deeper discounts are often available to those carrying more than one policy with a company - so if you have a car, investigate what is offered through your automobile insurance.

Whether you own or rent your home, you may want to add even further to your policies if you own jewelry, collectibles, artwork, and furs. The items may be irreplaceable, but at least you can recover your monetary loss.

Establish an emergency fund

One of the reasons financial professionals encourage people to establish an emergency fund is so that money will be readily available in the event of a disaster. So if you haven’t started a savings account, do it now.

Have a set sum deducted monthly from your checking account and automatically deposited into a savings account. Try to save ten percent of your net income until three to six months of essential expenses is built up (and after that, keep saving, with the surplus going towards other goals). Though the withdrawn amount may seem high at first, chances are you will quickly adjust to living on the remaining income.

While most of your emergency fund should be held in an account where there are no penalties for early withdrawals (such as a passbook savings account or money market account), keep a small amount of cash in your home or car. You may not be able to get to your financial institution or an ATM machine for a while.

Keep your credit card balances down

While credit cards are not intended to take the place of an emergency fund, they can be very useful if you need to check into a hotel or rent a car during a crisis. And if you absolutely have to use them as a cash source, you don’t want to build a bigger balance than you can reasonably pay off when the dust settles. If you currently have credit card debt, concentrate on repaying what you owe. Once the balances are low or nil, commit yourself to living within your means so you don’t run them up.

Plan for your estate

Nobody likes to think of their own mortality, but if you have loved ones who depend on you for financial support, it is important to plan for your estate.

Wills: A will allows you to leave property to your choice of recipients. Dying "in testate" (without a will) can lead to court battles that can dramatically erode the value of your estate, and assets being transferred to those who may not be your preference. Once you have a will, be sure to update it after such major life events as marriage, divorce, and birth of children.

Power of attorney: A power of attorney document will let you appoint a trusted individual to make fiduciary decisions on your behalf if you become unable to do so. It can give you peace of mind that your financial affairs will be conducted according to your wishes - even in the most dire of circumstances.

Living trust: True to its name, you create a living trust while you’re alive. Property is transferred into the trust - and because it is no longer part of your estate, it bypasses the long and expensive probate process. Though harder to contest than wills, living trusts are more costly and require extra ongoing maintenance.

Safeguard your financial information

Some disasters may force you to leave your home in a hurry, and you may not have the luxury of time to collect and save vital financial paperwork. Prepare the following documents and store them in the appropriate place.

In a home safe or firebox, keep:

• Enough cash for a few days worth of food and shelter
• Insurance policy documents
• Copies of deeds and titles for your home, car, and other real property
• Copies of previous year’s income tax returns
• Originals of wills and powers of attorney, if not with your attorney or local registrar
• Backups of computerized financial records
• Checking and savings account, loan, credit card, investment account information
• The key to your safe deposit box

In a safe deposit box, keep:

• Originals of deeds and titles to your home, car and other real property
• Appraisals of expensive jewelry and heirlooms
• Originals of previous year’s income tax returns
• Certificates for stocks, bonds, and other investments
• Trust agreements
• Copies of wills and powers of attorney, if not with your attorney or local registrar
• Home improvement records
• Household inventory documentation

When the skies are clear and the forecast balmy, the desire to put off such planning can be very strong. However, nobody knows when and to what degree a catastrophic event will occur - which is why being prepared is so crucial. And once done, you will be confident that even if the earth does shake, your financial foundation will remain firm.

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