Are You Prepared for A Disaster?
By Elizabeth Culpepper,
LendersMark.org Staff Writer
Tropical Storms and Hurricanes Are Large
Even people who live hundreds of miles from the coast are at risk. While coastal communities face damage from high winds and storm surges, inland communities are at risk for flooding caused by torrential rain that may result in widespread property damage and loss of life. In fact, according to the NOAA, inland flooding was responsible for more than half of all hurricane-related deaths over the past 30 years.
Residents in hurricane-prone areas should review their cash reserves and insurance coverage, and then take other measures to protect themselves and their property.
A cash reserve is a pool of funds (and sometimes credit) that you hold in a readily available form to meet emergency and other highly urgent, short-term needs. Sometimes, it is referred to as an emergency or contingency fund. A sound financial plan should ensure that you are protected when financial emergencies arise. In times of crisis, you do not want to shake pennies out of a piggy bank. Consequently, the first step in the financial planning process should be to establish a cash reserve.
The amount of your cash reserve should be based on your own personal situation. While basic guidelines do exist, you should adjust them to reflect your unique circumstances. You must take into account such factors as job security, the condition of your real estate, and the health of you and your dependents when determining the ideal size for your cash reserve. For more information, see What Factors Should Be Considered When Determining a Cash Reserve Goal? Naturally, such factors change with time, so an annual review and adjustments are important elements of the planning process.
How much do you need?
Your cash reserve should generally equal 3 to 6 months of ordinary living expenses. Occasionally, low job security or high income volatility might suggest having a reserve of up to 12 months of expenses. The actual number of months selected should reflect these and other significant risk factors, such as the adequacy of insurance coverage and the condition of any property you own.
Using Credit is an Option
The amount of credit available to you can be a secondary source of funds in a time of crisis. However, because borrowed money must be paid back (often at very high interest rates), do not use lenders as the primary source of your cash reserve. When a crisis produces an urgent financial need, you can still repay borrowed money, making credit a viable option in a multi-tier cash reserve structure.
Taking stock of what you have
List the locations and amounts of your money that you can withdraw on an immediate (or nearly immediate) basis without incurring a loss and tally the result. Typical sources include savings accounts, money market accounts, Treasury securities, and cash value life insurance. Be careful to exclude accounts set up to meet everyday needs or special objectives, such as education, vacations, or a new car. You can also include untapped credit resources, provided you count them separately from cash resources.
This is almost as easy as subtracting what you have from what you need. If you elect to consider credit resources part of your cash reserve, the procedure is slightly more complex, since part of the total amount must be held as cash (noncredit) assets.
Achieving your cash reserve goal
Your initial thought is probably that cutting spending and saving aggressively are the only options to achieve your goal. However, you may already have assets that you could make part of your cash reserve. These could include savings bonds coming due, the cash value of a life insurance policy you plan to convert, or even selling an antique you no longer care about. The discussion that follows explains methods that you can use to rapidly build your reserve fund to the desired level.
Here are a few other steps you can take, which are a bit beyond the scope of this discussion. We recommend you do some reading on these topics to ensure that you have the cash or lender resources you will need in the event of a catastrophe.
- Identifying, converting, and reallocating current assets to build your cash reserve
- Structuring and maintaining a cash reserve
- Stash the cash--deciding where and in what form to keep a cash reserve
- Ladder maturities of term deposits for better accessibility / lower interest rate risk
- Build a multi-tier cash reserve when using term deposits or credit lines
- Review/adjust your cash reserve annually to reflect your changing circumstances
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