Creating an emergency financial plan is one of the most important activities you should complete at the beginning of the new year. This type of plan is a necessary tool for individuals, businesses and organisations. For those who live in tropical weather zones, a financial plan should go hand in hand with insurance and other emergency plans. Although the Atlantic hurricane season officially runs from June to November of each year, it makes perfect sense to create an emergency financial plan well ahead of that period.
Reasons Why You Need an Emergency Financial Plan
The purpose of an early start is to give yourself or your business enough time to create an adequate plan for unexpected/ expected events and emergencies (not limited to hurricanes), thus making them a bit easier to manage if they materialise. It also gives you enough time to test your plan before you put it into action so that you can adjust where necessary; and put it back into action. Emergency financial plans should be a part of your wider emergency plan collection which also includes evacuation plans, business continuity plans and emergency response plans.
There are several reasons why an emergency fund is beneficial. The main benefit of this plan is that it can outline the steps to be taken if you find yourself in a financial emergency. For example, if natural disasters strike and cause damage to your home, your financial plan would outline how the damage would be covered. You may be able to rely on insurance, funds saved in a dedicated emergency fund or disaster emergency grants in your neighbourhood or country. Your financial plan will also outline what types of events are eligible for inclusion.
How to Create an Emergency Financial Plan
You can create an emergency financial plan in several ways, but you have to create a plan that suits your needs. If you choose to write down the intricacies of your emergency financial plan, it should be kept in a safe place where only you and a trusted person can access it. Because of the sensitive information that may be in the plan, confidentiality and security are very important.
1. Decide What Counts As An Emergency
One of the core components of your emergency plan, is a confirmation of what types of emergencies will be covered. It is very important that you clearly define what is classified as an emergency; and therefore what will be covered by the emergency money. This will help you to be more disciplined with your emergency money and not dip into the fund for each and every unexpected effect. Emergencies may include medical emergency expenses; home repairs that are not covered by insurance; damage caused by natural disasters and their associated impacts (e.g. strong winds, flooding, mudslides, fires); basic expenses in the event that you lose your job; bereavement expenses or even death.
2. Create an emergency savings account and start saving now.
You should keep money specifically for emergencies separately from your regular savings or chequing accounts. This account should not be used for day to day expenses. In addition to being created specifically to cover unexpected expenses due to tropical storms and hurricanes, the fund can be useful for other emergencies. To create this account, you may have to cut back on your regular monthly spending habits, so that you can fund your emergency savings account. You can start by eliminating non-essential items by identifying your needs and wants and amending your budget to include a line item for your emergency fund. If the time comes that you will have to use this fund, further steps can be taken to ensure that you exhaust all options available to you.
3. Keep Your Emergency Fund Well Funded
If you tapped into your emergency fund, there are two things that you should do. Firstly, you should start adding back money to it as soon as possible. If your fund has been depleted, you may be dejected. But you should see this as a positive learning experience. Now that you know how beneficial the fund is, you should be motivated to start adding to it when you get back on your feet. If it did not stretch as far as you hoped, this is the proof needed to justify increasing the limit of the fund.
Secondly, you must prepare a post-disaster debrief that outlines the full details of the emergency and the steps that you took to fix it. What was the emergency? How much did you spend? Were any of the expenses covered by other mean, such as insurance? This will allow you to assess the entire situation to see if you took the right steps; or if there was something that you could have done differently. Also, it provides a template for what you can do if a similar situation arises again.
Get Your Finances in Order
A good financial plan is dependent on your ability to have things in place that will allow you to adequately deal with emergencies if they arise. Although there is a strong focus on the emergency and what you should and should not do, there are a few steps that you can take in conjunction with your emergency financial plan.
1. Organise your Financial Documents.
List all of your accounts, where they are held; account numbers and an estimate of how much money is in the account. Also, clearly explain what each account is used for. Ideally, you should have an account that is dedicated to emergencies. If you do, this is the only account that should be mentioned in the plan.
2. Insurance Yourself and Your Belongings
If you have insurance for your personal belongings, you should have insurance for your life. In addition to house insurance and flood insurance, you should make it a priority to obtain health insurance and life insurance for yourself and your family. In the aftermath of an emergency, depending on the terms of the policies, you may be able to make claims.
3. Secure Your Personal Documents.
In addition to organising your financial documents, you should ensure that these documents as well as other personal documents are in a safe plan. Medical records; bank documents; housing documents; tax statements; insurance policies; and wills should be kept in an airtight container in a safe place.
Emergencies can create financial headaches, especially if you do not have a plan or a fund in place to deal with them. However, by having an emergency financial plan in place, you will be better prepared for the unknown risks if they occur.
References
- Financial Preparedness (Ready)
- How to Create Your Financial Emergency Plan (Wallet Hacks)
- Tips for Financially Preparing for Unexpected Events (The Balance)
- Preparing for Financial Emergencies (Ontario Securities Commission)
- What’s Your Emergency Financial Plan? (WFSU Public Media)
- COVID-19 Pandemic Shows Emergency Financial Plan Need (Tahlequai Daily Press)
- Why You Need an Emergency Financial Plan (Ten Path Financial)
- Creating an Emergency Financial Plan in The Middle of an Emergency (Medium)
- How to Create an Emergency Financial Plan (BECU)