The absolute best thing about getting my financial life in order is simply having the peace of mind that no matter what hardship came my way, I can financially cover it.

The Ultimate Guide to Financial Preparedness

“By failing to prepare, you are preparing to fail.” – Benjamin Franklin

The absolute best thing about getting my financial life in order is simply having the peace of mind that no matter what hardship came my way, I can financially cover it. And when those things ultimately do occur from time to time, they are undeniably easier to handle because I can focus on the problem at hand and not how I will be able to pay for (or finance) it. The benefits of financial preparedness cannot be understated.

The absolute best thing about getting my financial life in order is simply having the peace of mind that no matter what hardship came my way, I can financially cover it.

With all of the recent natural disasters, there’s been a lot of talk about preparedness. This discussion focuses centrally around having emergency supplies and evacuation plans in place. During an emergency, the priorities are food, shelter and personal safety.

Most people will find the realization during times like this that money isn’t nearly as important as ensuring the safety of those they love. But after the disaster is over, there are some serious financial implications that have to be dealt with.

With 57% of Americans not even being able to handle a $500 sudden expense, an emergency of any level is bound to be a serious financial crisis as well for most people.

But, it doesn’t have to be this way. How amazing would it be if you personally didn’t have to worry about the financial implications of such an emergency?

PREPAREDNESS TIP #1: (PHYSICAL) CASH STASH

I typically refer to cash when referring to both physical money and liquid funds in bank accounts. However, let’s talk about tangible cash for a minute.

There are a number of situations that may require you to have some physical cash tucked away. This includes times such as:

  • When power is down due to a natural disaster (both ATM’s and store credit card systems would be impacted)
  • If your bank or credit card information is fraudulently stolen and the bank places a freeze on the accounts
  • When you forgot to pull out cash in advance to pay the babysitter (okay, okay…I know this isn’t an emergency but this totally happens to me often and I use my cash stash for this too!)

I will admit that I haven’t been super consistent about keeping physical cash around. Several years ago, our apartment in Seoul was burglarized and the thief pried open our safe and stole all the cash we had in it (not a lot, but a traumatic experience nonetheless!).

Recently, I’ve come across enough reasons to keep cash on hand that I have started to keep a small amount at home again, including smaller bills as well. I hope to never need it for an emergency, but it has definitely been really convenient for things like school field trips, buying things locally on Craigslist or similar sites and of course, paying babysitters.

I’ve never had to use my cash for an emergency, but I can definitely see the benefit of having it readily available. My ideal amount is $250-300, which would cover basic living expenses for at least a week, plus some extra as well. I no longer keep the cash in a safe, but instead in a location that thieves would not think to look. I also keep a small amount in my car and some in my 72-hour kit.

PREPAREDNESS TIP #2: BASIC EMERGENCY FUND

Many experts recommend keeping $1,000 in an emergency fund. This is a bare minimum, because a thousand bucks really won’t go very far if your crisis is much bigger than a car repair or a minor medical situation.

Earlier this year, we had a sudden wind storm go through our local communities with winds up to 70 miles per hour. We were fortunate that we didn’t have significant damage to our property (or ourselves!), but we had an enormous tree branch fall at our rental property. It ended up costing well over $500 to fix the fence and remove the one fallen tree branch.

The number of unexpected small expenses that will come up is virtually unlimited. Some examples of what a basic emergency fund will cover include:

  • Automotive repairs
  • Home repairs or replacement of major appliance
  • Medical expenses
  • Veterinary bills

If you don’t yet have a thousand dollars in your emergency fund, you need to beg, borrow or steal save, sell, or do without to get it ASAP. You will be so grateful if you have that money even if it doesn’t fully cover your entire emergency.

PREPAREDNESS TIP #3: CASH RESERVE

In addition to the bare minimum emergency fund, it will truly be life changing to have a cash reserve that provides peace of mind in case of a larger scale financial devastation.

A cash reserve of 3-6 months of expenses could carry you through:

  • A period of disability or severe medical illness
  • A temporary job less of a few months
  • A major home repair, such as central heating and cooling systems, plumbing, septic, etc.
  • A natural disaster where you are not able to go to work for a period of time

You may not want to think about these types of incredibly stressful situations, but it’s very likely that at some point it will happen. And even if it never does, the peace of mind that comes with knowing that you are covered is worth all the sacrifice it will take to get to this point. The worst case here is that you can use your cash for an opportunity that comes up unexpectedly!

Saving 3-6 months expenses takes years for most people. If you have a windfall, even a small one such as a tax refund, there is likely nothing else that will improve your life as much as having a cash reserve to provide some extra security in your financial life. To get started, you can check out Coins in the Couch to $5K for tips on how to save a significant amount of cash in a short period of time.

PREPAREDNESS TIP #4: INSURANCE

Unless you’re already completely financially independent, there are many types of insurance that are essential to protect you financially.

In its basic form, you are exchanging money provided as premiums for the promise that if specific negative situations occur, the insurance company will take on the full risk of replacing the loss. This loss could be damage to your home or car or alternately could be loss of income due to a disability, death or legal action.

The basic types of insurance you need include:

In addition to simply having insurance, it’s important to make sure that you clearly understand what situations the policy covers (and doesn’t cover), your responsibility if there’s a loss including your deductible, and whether your current coverage amounts will fully cover the potential loss.

This is the one and only situation that I can think of where you want to feel like you’re throwing money away for nothing. If you never have to submit a claim for your insurance policies, you are very fortunate and you can attribute all of that “wasted” money to contributing to your peace of mind.

PREPAREDNESS TIP #5: DOCUMENTS

Verifying your personal identity is essential, as is protecting your identity. In times of emergency, you’ll want to make sure that you are prepared with documentation that will help to prove who you are and that you own certain assets.

I suggest both keeping your original important documents in a fire and waterproof safe as well as storing a copy of each on the cloud (DropBox, OneDrive, Google Drive, etc.). It is also a good idea to keep a copy with your evacuation kit or bug out bag if you have one.

The following documents are essential to proving your identity.

  • Birth certificates
  • Marriage license
  • Divorce license
  • Social security cards
  • Passports
  • Child identity cards
  • Military ID and records
  • Pet registration papers

Your essential financial documents would include:

  • Copies of current bills
  • Bank and brokerage statements
  • Insurance policies
  • Tax returns and documentation
  • Estate planning documents such as wills and trusts

I’ve recently been working on scanning in all of my past tax returns and other documents and it’s been a very time-consuming process. I’ve already benefited from having this information readily available though. I can only imagine that during an emergency, I will be incredibly grateful that I took the time to complete this now.

FINAL THOUGHTS

Being financially prepared not only provides benefits after a financial catastrophe, but even if you never have to deal with one at all. By taking the time to consider potential circumstances that could wreak havoc on you financially, you can ensure that you are ready for anything that comes your way.

What other tips do you have to be financially prepared?

 

 

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5 Responses

  1. Great advice! I definitely have a lot of work to do on the document preparation side of things.

    I love having a little bit of cash around the house for Craigslist action, Zoey’s chore cash and the babysitter dough.

    1. Going through documents is my least favorite thing for sure. And I totally hear you about the chore money…I gave up on a cash allowance system after months of never having the exact change around to fund it.

  2. I need to work on studying more on my life insurance. It’s the one thing that I have neglected because my parents set it up for me when I was in my early 20s and never had the urge to dig deeper into it. All I know is that I have universal life and I’ve add my wife and kid as beneficiaries the past few years. I’ll look into the link you provided about life insurance. Thanks for the reminder Kathryn!!

    1. Life insurance is definitely something you want to look into every couple years. It’ll give you peace of mind that your family is covered if something were to happen.

  3. This is amazing advice Kathryn! The emergency fund is so important, and the thing is people think it’s hard to save up, but if you save in advance and put your money in a high yield savings account or CDs, the money will compound over time. For example, if you start with $100, put in $50 a month, then after 5 years of saving (assuming 4% annual interest), you’ll end up with $3,448. Just a little everyday can really help!

    A little advice for anyone who thinks savings up to a few thousand is intimidating! 🙂

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