Financial Planning
August 8, 2022

Financial Disasters: How to Prepare

How to deal with money emergencies
Stewart Willis
Co-Founder & Co-Owner Asset Preservation Tax & Retirement

If 2022 has taught us anything, it’s that the unexpected is expected! When it comes to our finances, that’s particularly true. Unanticipated financial catastrophes can happen unpredictably. Even a conscientious money manager can be surprised. But there are ways to prepare for unforeseen disasters.

Build An Emergency Fund

One of the first steps of preparing for a financial disaster is to create a solid emergency fund. It’s important to have at least 3 to 6 months’ worth of living expenses saved in an easily accessible account. This money is set aside for emergencies only. It's there to help you avoid taking on debt if you fall on tough financial times. It should help you feel more financially secure. This fund is especially important if you should lose your job unexpectedly or if you suffer an illness that keeps you out of work and without a steady income for an extended period of time.

Consider moving your emergency fund into a high-yield savings account. This will help you earn more interest on your savings account funds. These accounts have the potential to earn a much better Annual Percentage Yield (APY) than you might with a traditional savings option. When preparing for a potential disaster, every penny counts.

Assess Your Risk Tolerance

Another important step is to make sure you are assessing your risk tolerance. If you're faced with a financial crisis, are your assets allocated in a way that you could stomach a loss? Understanding your comfort level with risk can help guide your strategies as an investor. Conservative investors should minimize their exposure to risk, or they will be very nervous during volatile times on Wall Street. Never bet more than you are willing to lose, especially if you are at, or nearing, retirement age.

A common philosophy is the Rule of 100. You subtract your age from 100, and that's the percentage of your portfolio that should be exposed to riskier investments. For example, if you're 60 years old, consider only having 40%of your portfolio in risky investments. The other60% should be in more conservative investments. If you're younger, you can take more risks and slowly scale it back as you get older.

Check Over Your Insurance Policies

When was the last time you looked over your insurance policies? Many people assume their homeowner's insurance will cover damage to their homes, but most do not cover earthquake or flood damage. If you find yourself with an insurance plan that isn’t covering everything you need, shop around. If possible, shop around for lower cost policies that may be available for you. Take inventory of what you have inside your home in case of a disaster. If you need to rebuild or replace items, you’ll need to know what you have and what is most important to you.

Not only do you need to be prepared to protect your home, but you also need to be ready to protect your health. Since Medicare coverage doesn’t begin until age 65, make sure you’re covered if you decide to retire at 62. Find out what your current plan will cover and any out-of-pocket expenses you could have. Make sure you are budgeting for any worst-case scenario health issues with your emergency fund.

Help Yourself Be Best Prepared

If you don’t have a financial planner now, you’ll be glad to have one on your team if a crisis occurs. Shop around until you find the financial advisor that works best for you. They can help you come up with the right plan to help you prepare for any financial disaster.

Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

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