Lately, I’ve been featured in a few places talking about one of my most passionate topics – emergency planning. You can check out more at CNBC or at my podcast episode with Bigger Pockets Money.
Long-time readers know this is a topic I’m personally passionate about because of the near-death of my husband seven years ago from an unexpected medical event. This was a big part of my push to become totally debt free, and partially why I started this site in the first place.
I saw a lot of people writing all about emergency funds, and why you don’t need them. But those people had never actually been through a life-changing emergency. Typically they were young, healthy, and often didn’t have kids. So they didn’t appreciate what it’s like to actually lead a family through a crisis of some kind. It was all a theoretical exercise for them, not a gut-wrenching reality.
In honor of my recent features, today I’m going to talk about emergency planning. Whether it’s a job loss, a medical event, death, fire, flood, hurricane, tornado, or anything else, if you’ve properly prepared it will be easier to bear. Yes, it still won’t be easy, but at least you’ll have some idea what to do.
What you don’t want is to hit an emergency with no idea on what to do next, or lacking the proper insurance, and then find yourself struggling to deal with the event as well and the lack of preparation at the same time.
So here are my top four categories I recommend you look at to ensure you, and your family, are prepared for the various types of emergencies that may occur.
And remember – it can happen to you.
Insure Against Losses You Can’t Afford
My husband’s medical bills totalled almost half a million dollars – could you pay that without going bankrupt? If your house burns down, can you afford to replace it? If your home floods, can you pay cash to rebuild? Say your car is totalled, in an accident that’s your fault, and the people in the other car are severely injured – can you afford to pay hundreds of thousands for their medical bills? If you unexpectedly passed away, could your family afford to live without your income?
If your answer to the above questions is “yes, of course I could afford that!” – then congratulations, you’re likely self-insured.
If it’s “no way”, then you need insurance.
Obtaining the proper insurance is a practice in risk mitigation. You’re paying a small premium to a company each month to spread the risk of something bad happening to you, with something bad happening to other people. You hope you’ll never have to use it, but it’s there if you need it.
What kinds of insurance am I thinking of? Here’s a short list of the most common types:
- Car insurance, both to repair/replace your car as well as protect you from liability if you injure or damage someone else
- Home, renters, or condo insurance, to repair/replace your home or belongings if something happens, and to protect you from liability if someone is injured on your property
- Personal umbrella insurance, to protect you at limits above and beyond what you have on your car and home
- Flood insurance, to protect your home from flood damage – which is usually excluded from your home insurance
- Health insurance, to help pay your medical bills
- Dental insurance, to pay for dental check-ups and procedures. As well as braces.
- Life insurance, to protect your loved ones and replace your income if you were to pass away
- Disability insurance, to protect your loved ones from loss of income in case of your short or long term disability
- Long term care insurance, to protect against the cost of needing nursing home care
- Other property insurance, such as boats, motorcycles, jet-skis, jewelery, etc.
Notice that in the above list I didn’t put “MacBook insurance” or “smartphone insurance”. The rule of thumb on insurance is that you should buy it to protect you from financial losses that you can’t afford yourself. If you could pay to replace your smartphone, for example, then don’t buy the insurance. If you can’t afford to replace it, then insurance might be a good choice.
More about insurance:
Make Sure You Have The Right Documents, In The Right Places
There are a number of documents that can help you in an emergency. These include documents such as:
- Wills, to ensure your wishes are carried out upon your and/or your spouses death
- Power of attorney, to ensure that you’ve provided permission to someone to handle financial affairs on your behalf in the event of your incapacitation
- Health care power of attorney, to ensure you’ve outlined who can make health care decisions for you in the event you’re incapacitated
- Health care directive, to provide your loved ones on direction on your wishes should you need life support (feeding tubes, ventilators, etc.)
- In case of emergency documentation, to outline what family, friends, and loved ones need to know about your affairs (passwords, financial accounts, etc.) should you be unable to communicate
Yes, these documents are often depressing to pull together. But trust me, they’re invaluable in an emergency. When my husband was on the ventilator, I didn’t know what he wanted in terms of life support. I didn’t know what he wanted for a funeral.
I was only thirty-one: I had never thought to have the discussion with him.
Don’t make that mistake. Carve out time to commit to getting this kind of documentation together, and stored in a safe place like a safe deposit box or safe in your home. Make sure several people know where you’ve stored the documents.
More about documentation:
Make Sure Money Isn’t A Problem
You want to go beyond the emergency fund here – and make sure you have a proper emergency financial plan.
Too many “financial gurus” will tell you things like you should invest your emergency fund, or that you shouldn’t keep cash lying around. Those people have usually never had an actual emergency. Also, they tend to think that job loss is the only emergency you’re preparing for.
I want you to know that you need to go beyond the emergency fund and have a true emergency financial plan.
What does that include? Things like:
- Being debt free, or working towards it. Because when bad things happen, debt is like a vice around your heart. Not only do you have to deal with increased expenses, and decreased income, but you still have to meet your financial obligations or you’ll be in trouble. Adding debt to the mix of a real emergency leads to a greater likelihood of financial disaster.
- Life below your means. If you’re always saving and investing for the future, whether that be in an emergency fund, retirement account, or 401k, you’re creating breathing room in your budget. You’re living at a level below your income, which means that in an emergency, you can cut back on saving and investing and use that increased cash flow. Also, the less you have in fixed expenses, the easier it is to cut back when something bad happens
- Have an emergency fund – but also an emergency financial plan. Most personal finance gurus will recommend keeping 3-6 months expenses in a safe, easily accessible account. I suggest you go beyond thinking of an emergency fund as a simple pot of money in a savings account to protect you from job loss. Instead, look at your total financial picture to see where you could draw money from if it were needed.
More about creating an emergency plan:
We’ve covered insurance, documentation, and money. But there are a lot of other “miscellaneous” things you’ll want to consider in your family emergency planning.
- Having a safe or safe deposit box, where you keep important documents safe from fire and theft.
- Creating a list of passwords, and financial accounts, for loved ones to use in the event of your disability or death
- Have a fire escape plan, so your family knows what to do if they wake up to a fire in the home
- Keep a first aid kit, and learn CPR. Teach your kids first aid and CPR (my boys know both!)
- Teach your kids how and when to call 911. Because you never know when they might need to.
- Prepare for being powerless. My family went without electricity for a week after a terrible October snowstorm knocked power out for most of CT. We have a well, which means no power – no water. But we also have camping equipment, and keep water around the house for emergencies.
- Keep emergency food stores. Letting your food run down to almost nothing means if there’s an emergency and you can’t get out, you’re stuck. Keep some long-storing food (like pasta or canned food) that you could quickly cook in an emergency
My older two sons are both Boy Scouts, with my oldest working towards Eagle Scout. And their motto, “be prepared”, resonates with me.
Being prepared means more than just having a three to six month emergency fund for a job loss. It means taking a holistic look at your insurance, your documents, your money, and other aspects of the various types of emergencies that can occur.
Make sure you’re prepared, so if something happens, you can focus on dealing with it and moving forward.
What other emergency planning tips do you have? Let me know in the comments!
3 thoughts on “Emergency Planning – Four Things To Consider”
Thanks for sharing on this topic. I liked how you kicked it off – the theoritical math exercise might say no emergency fund is needed. But theory is not real life. I’ve always gone with the, “whatever helps you sleep at night approach”. And for me, thats usually 3-6 months.
My dad & step mom called yesterday, as they are updating their emergency book. They wanted to remind me & for me to pass on to my siblings, to make sure any medical advocates are also on your HIPPA list with your doctor. This is even more important if your decision maker isn’t your spouse for any reason. (Ex, you have a friend or family member who is a medical professional who would be comfortable with the jargon, and your spouse has told you they would be overwhelmed trying to make a decision.)
This is such an important thing to talk about. It drives me insane when I see people talking about not needing an emergency fund (or, alternatively, how $1K is totally an appropriate amount for an emergency fund). It’s exactly like you said: these kind of emergency situations can literally happen to anyone.
On that note, this post totally reminded me that I absolutely need to stop procrastinating re: making sure I have the right documents in the right place. I think I have put it off for a long time because…well, I’m 29. But again: anything can happen. So thanks for that reminder.