While we all hope we’ll never face a disaster and the financial emergency that may result, sometimes life has other plans.
Whether it’s a fire or flood that damages or destroys your home, or you’re facing sudden medical emergencies, a disaster event could throw your finances into disarray if you’re financially unprepared.
We’ve got some tips below to help you plan ahead and recover in the event disaster strikes.
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Track your budget
A budget, in its simplest form, is a list you use to plan your average monthly expenses against your average monthly income.
When an emergency strikes, one of the first financial steps you should take is to determine which costs you can afford to cover and which ones you can’t. Having already established a budget can help you pinpoint that information more quickly and help determine exactly how much help you may need.
Save for emergencies
If you don’t have money saved for emergencies, you’re not alone. According to a May 2017 report from the Federal Reserve, 44% of U.S. adults aren’t prepared to cover an unplanned expense of just $400.
Keeping money saved can help you cover unexpected costs after a disaster, or even temporarily replace your income if necessary. And having emergency funds on hand can also help you cover nondisaster expenses when needed, like car repairs.
The amount you can realistically set aside depends on your financial situation, but many experts recommend saving three to six months’ worth of your regular living expenses.
Even if you can’t save six months’ worth of your living expenses, just putting a little bit aside from each paycheck is a great place to start.
Where should I keep my savings?
There may be space for a wad of cash between your mattresses or in your sock drawer, but you’ll regret keeping your money there if your home is flooded or destroyed by a fire.
Your emergency savings should be kept in an account that can be quickly accessed without any penalties. Though many people think of their retirement account as a form of emergency savings, making an untimely withdrawal from your retirement can cost a lot in fees and taxes.
Instead, consider keeping your emergency savings somewhere separate, like an FDIC-insured savings account or a money market account. That way it can stay secure and earn a little bit of interest, but still be quickly withdrawn when disaster strikes.
Carry proper insurance coverage
When deciding what insurance coverage you need, consider protecting any assets important to you or your family’s livelihood. For most people that means carrying homeowners insurance, auto, life and health insurance. If you live in an area prone to natural disasters like wildfires, hurricanes, tornadoes or floods, you may want specific insurance for that possible event, such as flood insurance. You’ll also want to cover any tools or property you need in order to do your job.
But how much coverage do you need? When it comes to any physical assets, you’ll ideally want to be covered for an amount equal to the asset’s value, or to the amount it would cost you to replace the item.
Not a homeowner? Renters may take for granted that the belongings in their home aren’t insurable, but generally for around $20 a month you can insure your electronics, furniture and clothes against theft, fire damage or other disasters. And your policy may even cover temporary housing costs if a disaster event, like a fire, displaces you.
Keep good records
Keeping an updated inventory of your assets can help you avoid having to dig for information that your insurer needs when you file a claim after a disaster.
Keep a list that includes the make, model, serial number and purchase date of any big-ticket or specialty items, like electronics, artwork or jewelry.
Also consider keeping copies of all your important records and documents stored in digital format preferably on a cloud-based platform. That way you can prevent them from being lost if your home is destroyed.
If your insured property was damaged, one of the first steps you should take after seeing to the immediate safety of everyone in your household is to reach out to your insurers so that you can start the claims process as quickly as possible.
Make sure to provide thorough documentation of the damages you’ve experienced.
For example, if your home is flooded, taking a 360 video of each affected room in your house (if it’s safe to do so) can provide a clear overview of damage and help your adjuster estimate construction costs.
If you’re unable to pay your debts after a disaster, then it’s important to reach out to your creditors as soon as possible and definitely before your next payment due dates. Consider your budget and your emergency funds, and then communicate what you can afford to pay and when, so that both parties can try to agree on a workable payment plan moving forward.
Some lenders have special options to help you reduce or temporarily suspend your loan payments if you’re facing specific hardships, but you may not have access to that assistance unless you reach out and ask.
What if a disaster means I can’t afford my student loan payment?
When you’re facing financial hardship due to a disaster, you may be tempted to ignore calls from your lender or mail regarding your loans. But once you’ve fallen behind on a student loan, your options for repayment could become fewer and fewer.
If your loan goes into default, the penalties could be severe. They could include having your wages garnished, your tax refund intercepted or being on the receiving end of a lawsuit. That’s why facing the problem head-on is generally the best way to respond. Reach out to your lender and see what options are available to you.
You’ll likely have a greater variety of payment arrangements for your federal loans than for private loans, but depending on your circumstances you may qualify for several different reduced or deferred payment plans.
Apply for assistance
It’s important to use relief assistance that may be available to help in your time of need. Consider applying for relief through United States government agencies like the Federal Emergency Management Agency (FEMA) or Social Security Administration or through private aid from established charities like the Red Cross.
Here are a few organizations that may be able to help with disaster recovery.
- Federal Emergency Management Agency
- Disaster Loan Assistance from the Small Business Administration
You may need to adjust your budget to reflect any changes that have taken place. If your expenses have increased, even temporarily, you’ll want to note that in your budget. If your income has changed, plug in your new expected income, even if it’s just unemployment. And if you’ve experienced a disaster that has caused you to lose your income entirely, you’ll need to consider how your savings or other available funds can be used beyond a recovery period, to help cover costs while you’re looking for work.
Covering all of your bills might be a challenge. If so, you’ll have to prioritize which bills to pay based on your needs and the consequences of a missed payment. It can be helpful to rank your expenses based on importance.
How do you decide which bills to pay? Start with absolute necessities like food and prescribed medications, as well as costs you have to cover in order to maintain your housing or employment.
Another high priority is secured debts, like mortgage and car payments. That’s because physical property can be taken away if you fall behind on secured loan payments. Keep in mind that even if your home, and in some cases your car, was damaged as a result of a disaster, you’ll still be responsible for repaying your loans.
What happens if I stop paying my mortgage?
If you’ve fallen just a couple of weeks behind on your mortgage payment, you may still be within your “grace period,” if your lender offers one. But after the grace period ends, you’ll likely be charged a fee for being overdue.
If you fall further behind, you’ll face additional complications. The foreclosure process can begin after you’re 120 days late.
If you think you might miss a payment and you want to keep your home, reach out to your lender as soon as possible to discuss your options. You may be able to refinance your mortgage or set up a repayment plan to help you get current on your loan again.
Next, consider other payments that could involve fees or a hit to your credit health if you miss them. That includes credit cards or loans where the servicer hasn’t agreed to suspend your payments.
Missing payments on debt isn’t ideal, but when it comes down to it, it’s more important to focus on things like food and shelter. You can work on regaining any lost points to your credit scores, and getting current on credit cards and unsecured loans, once your situation and finances are more stable.
And if it’s an option, you could also consider taking some further measures to help increase your income while you get back on your feet after a disaster. If you can rent out an unused room or take a seasonal side-job, this could help you recover that much faster.
After you experience a disaster event and it’s time to deal with the financial fallout, take a moment to think clearly about your new financial situation. Spending money without a plan — or avoiding creditors — can limit your options or lead you to fall behind on the payments that matter most, potentially creating a longer-lasting financial hardship.
Adjusting your budget or reaching out for help may feel less desirable than a quick solution, like taking out a new loan or liquidating your retirement. But that may not be the best option for your long-term financial health. A new loan means that your monthly expenses will increase, thanks to a monthly minimum payment and interest, and a withdrawal against your retirement can involve major taxes and penalties, which in some cases could total up to 50% of your account balance.
There may be more-cost-effective options for you. Perhaps you could sell an unused asset. Whatever your situation, make sure to carefully weigh all of your options before making a major decision.
Taking time to plan before disaster strikes can head off stress down the road. By budgeting, paying down existing debt and contributing to an emergency fund, you can help yourself get more prepared for the unexpected.
If you’re worried about unexpected expenses because of the COVID-19 pandemic, you’re not alone. And you may be able to get some help from relief measures that the government, lenders and credit card issuers have put in place during this time. Check out our summaries of those measures below.
Government relief measures for your small business or household
Relief measures from lenders and credit card issuers
- Coronavirus auto loan payment and debt relief: What some auto lenders are doing to help
- Coronavirus: Mortgage debt relief programs for homeowners
- Coronavirus credit card payment and debt relief: How issuers are responding to COVID-19
- Coronavirus student loan payment and debt relief: What lenders are doing to help
Tips for budgeting and paying down debt
If you’re looking for general tips on how to budget or navigate your finances, we’re here to help with that too. Check out some of our advice articles below.