As we saw with Hurricane Beryl a few weeks ago, tropical storms and hurricanes can be unpredictable, with the potential to cause both physical and financial damage. Financial storms and financial uncertainty can also be challenging, often requiring years of rebuilding. While preparing for financial uncertainty will not guarantee that you will be unaffected, a proactive approach that addresses the most common vulnerabilities can help you feel empowered as you face the unexpected.
Job loss
According to the latest figures from the Department of Labor, the unemployment rate is near 4.1 percent, .5 percent higher than in June of 2023. While the loss of a job can be devastating, there are things that can be done that may help prepare for this financial hardship. First, consider building a solid safety net or emergency reserve. If you are a two-income household, a 3-6 month cash reserve may be sufficient. If you or your family relies solely on one income, you may need to target a 6–12 month emergency reserve instead. While building that size safety net will likely 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 the storm; preparing your own “worst case scenario” budget may help provide clarity on how you might cut your spending if you were forced to. The bottom line is that preparing for a financial storm before it arrives may help.
Property Damage
As you acquire assets and build your net worth over time, it is critical to protect these assets. Property and casualty insurance is a 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 its limitations is important – before the unexpected occurs. Too often policyholders 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 apples-to-apples comparison of coverage, deductibles, and exclusions before changing providers.
Physical Health
Few unexpected challenges can be more devastating emotionally and financially than health-related issues. In fact, a prior 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 who filed for bankruptcy due to medical expenses had some form of medical coverage. In other words, having basic 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 to which others rely on you and your income to meet their needs will determine the extent to which 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.
Market Volatility
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 prior 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. Remember, 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®, AIF® is a CERTIFIED FINANCIAL PLANNER & 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.
