Disaster planning is a critical exercise for most businesses. The idea is to devise contingency plans for the continued ongoing operation of the company in the event of a major storm, fire, terrorist attack or other natural or man-made disaster.
In the same way, individuals should do some financial disaster planning so they can be prepared if a personal tragedy strikes themselves or their families. This type of planning falls into two broad categories: planning for an unexpected large expense or loss of income, and planning for the sudden death of a spouse.
Building an Emergency Savings Fund
Many experts say that the best way to prepare for an unexpected large expense or loss of income is to build an emergency savings fund. Also sometimes called a “rainy day” fund, this is simply a savings account that’s separate from other accounts (like retirement and college savings vehicles) and devoted exclusively to covering large unexpected expenses (like expensive home or car repairs and large medical bills, for example) or a loss of income due to a cutback in work hours or job loss. Without an emergency savings account, you will likely have to incur debt to pay for expenses like these.
In fact, many people in this situation typically pay for such expenses using a credit card, which is probably the worst strategy of all, given the relatively high interest rates charged on most cards. Tapping into a home equity loan or home equity line of credit (HELOC) is usually a better debt option, but this is still more expensive than paying for large expenses in cash out of your emergency savings account. Of course, this option is only available to homeowners. Another option is to borrow from the cash values of a permanent life insurance policy if you have one.
Unfortunately, many individuals have not taken this basic financial disaster-planning step. Research indicates that more than one-quarter of Americans have zero emergency savings, leaving them totally exposed to a financial disaster, and half of Americans have saved less than three months of living expenses in an emergency account. Only a quarter of Americans have saved at least six months' worth of living expenses in an emergency account — the minimum amount of emergency savings recommended by many experts.
Your emergency funds should be stashed in a safe, liquid savings account that you can tap into quickly and easily when you need the money. The best options are usually an FDIC-insured banking savings or money market account. Such an account is not going to pay very much interest, but that’s not the goal — instead, you want to protect these funds from loss and make sure they are easily accessible without penalty when you need them.
The first step to building your emergency savings account is simply to get started. Even if you can’t afford to save much money right now, at least start saving something. Open a savings or money market account at your bank and then arrange for automatic transfers of as much money as you can afford into it each month. You can increase this amount as your income rises over time until you have built it up to a level that makes you feel comfortable.
Planning for a More Serious Tragedy
The premature death of a spouse is obviously a far more serious tragedy that an unexpected large expense or a job loss. This is true from a personal and emotional standpoint, of course, but also from a financial perspective.
This tragedy is magnified when the spouse who died was the family’s primary earner and/or the financially dominant spouse, or the one who was mostly responsible for paying bills and making family financial decisions. In this scenario, the surviving spouse not only has to deal with the personal tragedy of losing a spouse, but also with the stress of managing the family finances and replacing his or her spouse’s lost income.
Therefore, the best way to prepare financially for such a tragedy is for both spouses to share in the family’s financial responsibilities. It’s OK if one spouse takes the lead in family financial decision-making and bill paying, but the other spouse shouldn’t be completely in the dark in these areas.
Here are a few other financial disaster-planning steps that can help your family prepare for a spouse’s sudden death:
- Reexamine your life insurance coverage levels. Life insurance is the main vehicle for providing income replacement for family members in the event of a spouse’s premature death. If you don’t currently have life insurance on your family’s primary earner, start shopping for a policy today. If you do, go back and make sure the death benefit is adequate to meet your family’s financial needs for whatever period of time you decide is appropriate.
- Reexamine your disability income coverage levels. Disability insurance is an often overlooked and incredibly important way to protect yourself. In fact, suffering a disability is a higher probability than a premature death. If you can access group disability coverage through your employer be sure to do so as this is the least expensive way to cover this need. If you already have disability coverage, make sure your current monthly income is sufficiently covered.
- Make sure that both you and your spouse’s last will and testaments are up to date. Again, if you don’t have a last will and testament, make an appointment today with a lawyer to have one drafted. If you do, go back and make sure that its provisions reflect the current realities of your family situation. If you have a living trust, make sure it also reflects your current situation.
- Draft a living will and a power of attorney for you and your spouse. These are separate documents from your last will and testament. A living will dictates whether you want life-sustaining measures to be implemented on your behalf if you’re incapacitated and can’t communicate this yourself. Meanwhile, a power of attorney designates someone to make legal and financial decisions on your behalf if you are incapacitated and can’t make them.
- Include both spouses’ names on assets. In most instances, ownership of assets like real estate, bank accounts and investments should be specified as “joint tenancy with right of survivorship.” You can add a spouse’s name as the owner of your home by filing a quitclaim deed with your county.
- Make sure both spouses have access to all online financial account user names and passwords. Create a system that works for you and your spouse for storing and sharing this critical and sensitive information. You can either write it down and store it securely (like in a locked safe) or use an online file storage site — SecureSafe and BoxCryptor are two popular options.