While Hurricane Hermine may not have lived up to all the hype, parts of the east coast and Florida are still cleaning up. As we have learned over the years, these storms can be unpredictable, with the potential to cause a tremendous amount of physical and emotional damage. In a very similar way, financial storms can also be devastating, requiring years of rebuilding. While preparing for a financial storm will not guarantee that you will be unaffected, a proactive approach that addresses the most common vulnerabilities can help.
According to the latest figures from the Department of Labor, the unemployment rate is currently 4.9 percent. While this rate may be encouraging, there are nearly 2 million Americans that have been unemployed for 27 weeks or more. This statistic may be higher when you include discouraged workers that have given up seeking employment altogether. While the loss of job can be devastating no matter how long you are without work, there are things that can be done that may help prepare for this financial curve ball. First, consider building a solid safety net or emergency reserve. If you are a two income household, a 6-month cash reserve may be sufficient. If you or your family relies solely on one income, you may need to target a 9-12-month emergency reserve instead. While building that size safety net will take time, homeowners may want to also consider opening a HELOC (home equity line of credit) to provide an additional layer of security.
In the same way banks are financially stress tested to see if they have sufficient resources to weather a storm, preparing your own “worst case scenario” budget may help provide clarity on how you might cut your spending if you were forced too. Bottom line, preparing for a financial storm before it arrives may help.
As you acquire assets and build your net worth over time, it is critical to protect these assets. Property and casualty insurance is critical part of proper planning. From reviewing home and auto insurance coverage to umbrella insurance and business coverage, understanding the extent of your insurance and their limitations is important – before the unexpected occurs. Too often policy holders cut corners, electing for cheaper insurance and gaps in coverage only realizing later that they lack the coverage they need. Consider speaking to a specialist in this area to review your current coverage. Be sure to make an accurate apple to apples comparison of coverage, deductibles and exclusions before changing providers.
Few unexpected challenges can be more devastating emotionally and financially than health related issues. In fact, a well-publicized Harvard study suggested that nearly 62 percent of bankruptcies may be due to medical related expenses. The study also suggested that nearly 72 percent of those that filed for bankruptcy due to medical expenses had some form of medical coverage. In other words, having medical coverage may not be sufficient to protect yourself financially. Be sure to carefully evaluate health insurance, deductibles, prescription coverage and exclusions. Health insurance is another area where many choose to cut corners so be careful.
Protecting yourself and your family is not limited to health insurance. Disability, life and long term care coverage must also be carefully reviewed as failing to address these issues can also contribute to financial hardships. While you want to be careful to avoid being over insured, the extent that others rely on you and your income to meet their needs will determine the extent that coverage may be required. Determining how much insurance is needed can be difficult. However, working with a professional to conduct a needs analysis may help quantify any shortfalls in your current group or individual coverage.
History shows us that it is not possible to predict exactly when the next stock market storm will occur. However, there are strategies that should be considered to prepare yourself and your portfolio. First and foremost – have a plan. According to a CFP Board survey on the Financial Planning Profiles of American Households, only 19% of those surveyed had a comprehensive financial plan that extended beyond a simple household budget. There is no way to fully understand how to allocate your portfolio if you lack clarity on what you need your portfolio to do for you – a plan can help. Next, be sure to carefully examine your risk budget – the amount of risk you can afford to take while pursuing your goals. Portfolio stress testing may help simulate the potential impacts of the next financial storm before it arrives. While market volatility is inevitable and overreactions should be avoided, addressing risk before you experience that next correction may help you stay on track with your investment plan.
They say the only certainty in life is uncertainty. While you may not be able to address every possible exposure or scenario, establishing a game-plan that addresses the areas noted above may help you reduce stress as you pursue your financial goals for the future. Since everyone’s situation is unique, consider speaking to your tax and financial advisers to determine the most appropriate approach for you.
Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm Practitioner & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.