Life
has a way of throwing us some curve balls. Just when you least expect
it, you may lose your job, you or a family member can come down with
a serious illness or lose your home and belongings in a natural disaster.
While you can’t control an accident and the unexpected emergency
from happening, you can take precautions to be financially prepared.
Here is a financial checklist and some tips to help you get started:
Create an emergency savings account
Keep enough savings to last at least three to nine months covering all
living expenses in an easily accessible account such as a savings or money
market account. This will allow you to access these funds quickly if needed.
To help increase your emergency savings fund, consider setting up an automatic
withdrawal from your checking account on a weekly or monthly basis. You
may also want to consider funneling tax refunds or holiday bonuses toward
these emergency savings as well.
Have adequate insurance
Finding out that you do not have adequate insurance after an emergency
or natural disaster strikes will make matters much worse. Make sure that
you have homeowners insurance, life insurance, disability insurance and
car insurance. Depending on where you live you may also need extra insurance
for natural disasters, such as earthquakes or floods, which are often not
covered in typical homeowners insurance policies. Also, make sure you understand
what your insurance covers and know the difference between full and partial
coverage.
Know your options
If you find that you don’t have enough money in your cash reserves
nor do you have adequate insurance, you may still have some options in
case of emergency. For example, you may be able to open a Home Equity Line
of Credit (HELOC). Opening a HELOC can be a sound idea, because there can
be no cost to open them and you are not obligated to use the money. If
you don’t own a home or have not built up enough equity in your home
you can also with draw up to half of your 401(k) balance or $50,000, whichever
is less. Since you are technically borrowing your own money, you will not
be taxed. It is considered a loan, so you will need to make timely payments.
If you don’t, you will lose the before-tax privileges. Rules, fees
and interest rates vary by employer, so check with your human resources
department. It is worth noting that typically, if you leave the company,
the 401(k) loan balance is due in full. Also, defaulting on this loan could
cost you your home, since it is used as collateral against the loan.
Government help
You are eligible for help from the Federal Emergency Management Agency
(FEMA)’s Individual Housing Program if your house has been damaged
or destroyed by a natural disaster, you do not have insurance and the president
declares your area a “disaster” area. Grants up to $25,000
are available. If your house was insured, but the insurance doesn’t
cover all the damages, you are still eligible for assistance from FEMA,
but your claim cannot include personal items. If your insurance, 401(k)
and FEMA don’t cover all your losses, the government also offers
low-interest loans through the Small Business Administration (SBA). Learn
more at www.sba.gov.
Conduct a household inventory
It is important to have a complete list of all your possessions in the
event that your house is damaged or destroyed. This will help you get a
fair insurance payment and show proof when you want to deduct your losses
on your tax return. Consider using a video camera to document your home
and possessions, including your vehicles.
Keep documents safe
Once you have completed your home inventory make sure you keep this documentation
in a safe deposit box at a bank. Other important documents such as deeds,
insurance policies, birth, marriage and death certificates, stock and bond
certificates and vehicle titles should also go in this safe deposit box.
Stashing recent tax returns or other financial documents in your safe deposit
box may also be helpful. And don’t forget a copy of your will — the
original should be filed with your attorney.
Avoid credit card debt
During an emergency you should try to avoid piling up large sums on your
credit cards. This will make it harder for you to get back on your feet
later. Consider restructuring your lifestyle during this financial crisis
and adjust the way you spend until things get back on track.
Meet with a financial advisor
Consider meeting with a financial advisor who can help you create a comprehensive
financial plan that includes emergency planning. A qualified advisor will
determine if you have adequate emergency reserves and insurance to properly
protect you and your family.
This information is provided for informational purposes only. The information
is intended to be generic in nature and should not be applied or relied
upon in any particular situation without the advice of your tax, legal
and/or your financial advisor. The views expressed may not be suitable
for every situation.
Ameriprise Financial Services, Inc. Member NASD. American Express Company
is separate from Ameriprise Financial Services, Inc. and is not a broker-dealer.
