How to Prepare Financially for Emergencies

The wildfires in Los Angeles are a reminder that disasters can strike at any time. When they do, it’s important to be prepared to protect yourself and your financial well-being. 

Unfortunately, only half of adults (51%) believe that they are prepared for a disaster, according to a survey by FEMA. A majority said they haven’t saved for a rainy day to cover emergency costs, and less than half said they have assembled or updated disaster supplies. 

About 64% of homeowners don’t have enough insurance to rebuild their homes, and their homes are underinsured by an average of 27%, according to CoreLogic. One in 13 Americans don’t have any homeowners insurance, according to the Consumer Federation of America.

Without cash reserves, adequate insurance coverage and an emergency plan in place, recovering from a disaster can be even more challenging. To ensure that you’re financially prepared, take these steps. 

Create an emergency fund

Emergency savings are critical for disaster preparedness, according to FEMA. You need a way to pay for emergency supplies, evacuation expenses, insurance deductibles and home repairs. You might even need money to replace your paycheck if a disaster leaves you unable to work temporarily. 

It’s better to have cash on hand to cover these costs than to have to rely on credit cards, loans or borrowing from friends and family. Ideally, you should have enough in an emergency fund to cover three to six months’ worth of expenses. At a minimum, aim to set aside enough in a savings account to cover the amount of your homeowners, auto and health insurance deductibles.

Building an emergency fund might require reviewing your spending to find ways to cut costs and free up cash for savings. Determine how much you can afford to set aside and have that amount automatically transferred from your checking account to an interest-bearing savings account each month.

Review your insurance coverage

You don’t want to discover after a disaster that your homeowners insurance won’t cover some or all of the damage. That’s why it’s important to review your policy or call your insurance agent to find out what is and is not covered.

When reviewing your existing policy, make sure you understand the following:

• Covered perils: Standard policies cover damage related to fire, lightning, windstorms and hail, falling objects, water damage and other disasters specifically listed in your policy. Damage caused by floods and earthquakes is not covered. Flood insurance must be purchased through the National Flood Insurance Program managed by FEMA. Check with your homeowners insurance company about purchasing earthquake coverage if you are at risk of earthquakes. 
• Policy coverage limits: Review the maximum amount your insurer will pay for claims related to your dwelling, your belongings (personal property) and liability for lawsuits related to your property.  Standard policies cover belongings up to an amount equal to  50% to 70% of the insurance on your dwelling, according to III. Conduct a home inventory to determine if you have enough coverage for your belongings. You might need additional coverage for high-value items such as jewelry, artwork and collectibles.
• Replacement cost versus actual cash value: Find out whether your property is insured for the amount it will cost to replace it or the cash value that factors in depreciation (a lesser amount than replacement cost value). If you have guaranteed replacement coverage, your policy will pay the full cost to rebuild your home even if it exceeds your policy limits.
• Additional living expenses coverage: Standard home policies cover the additional costs of living away from home if you can’t live in your home due to a covered peril. This coverage has limits, and you need to know what they are. 
• Deductible: This is the amount you have to pay before your insurer will pay on a claim.

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Have a “Financial Go Bag”

In addition to having a disaster supply kit, you should have what WalletHacks.com Founder Jim Wang calls a Financial Go Bag. It doesn’t have to be a literal bag, but it should be something you can carry with you if you have to leave your home during a disaster. 

Make sure you have the following items collected and ready to go:

• Cash: “As the saying goes, cash is king, and if there's no power, you still have cash to have purchasing power,” Wang says. “I like having $500 or $1,000 in small bills, whichever makes sense for your finances.”
• Financial and legal documents: Wang includes anything that would be difficult to replace and necessary in an emergency, such as a home deed, car titles, Social Security cards, birth certificates, marriage certificate, passports and insurance policies.
• A portable hard drive: Store digital copies of  tax returns, financial and estate planning documents and any other important information on a portable hard drive that you can take with you. Another option would be to store important documents in a digital vault, such as the one included with financial safety service Carefull. 
• Emergency contact information: If you lose your phone or your battery dies and can’t be recharged, it’s useful to have a list of numbers for friends, family, insurance agents and any financial professionals you work with.
• A financial emergency plan: Wang recommends creating a plan for handling various emergencies. For each emergency, create a checklist of what to do, such as how to file an insurance claim when your home is damaged. Having this information will make it easier to know what steps to take when you’re dealing with the emotional stress of an emergency.

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