Preparing for emergencies

27th April 2009

In this article, Informed Choice chartered financial planner Martin Bamford outlines some suggestions for preparing your finances for a large-scale emergency or disaster.

News over the weekend of an emerging global influenza pandemic will have some people thinking about their financial planning in the event of a large-scale emergency.

An important principle by which I have always lived my life is 'prepare for the worst, expect the best'.  We would all be pretty miserable if we lived in constant fear of disaster.  

Yet events over the past decade have brought preparedness for the unexpected to the front of our minds.  Terrorist attacks, natural disasters and now the threat of a global swine flu pandemic are triggers to consider the financial implications of being caught up in a real emergency.

Your emergency fund

Whenever you read an article about basic Financial Planning, there is always talk about building an 'emergency fund'.  After the eradication of expensive unsecured debt, creating a fund of money for a 'rainy day' is one of the most important financial planning steps you can take.

Experts often suggest that your emergency fund should be calculated by reference to typical expenditure over 3-6 months.  If you spend £2,500 a month on the things you cannot live without, your emergency fund needs to be between £7,500 and £15,000.  Depending on your risk profile and general outlook you might choose to keep more or less than this in a cash emergency fund.

Your emergency fund needs to be readily accessible.  There is no sense in setting aside money for an emergency in an account which ties the money up for several months or longer.  Under normal circumstances this means keeping the cash in an instant access account.  In extraordinary circumstances, where the infrastructure of society starts to break down, you might want to have physical cash in your possession rather than money in the bank.

Something as simple as a widespread power cut could prevent you from withdrawing cash from the bank or using plastic to pay for goods for several days.

Keeping cash at home is not something we would usually recommend.  There are several reasons why this is normally a bad idea.  You might not get much interest on savings at the bank right now, but at least some interest is added.  When your cash is at home it earns no interest and has no prospect for growth.  

There is also the safety and security issue to consider.  Cash at home needs to be locked away safely for protection from burglary, fire or flood damage.  You will also need to check the terms of your home contents insurance and possibly notify your insurer about the presence of cash at your property.

Important papers

If you are anything like me, on a shelf somewhere at home will be several folders containing policy documents and statements.  Mine are relatively well organised, but many of the clients we work with turn up to meetings with a pile of important paperwork in the less than glamorous surrounding of a plastic carrier bag.

In the event of a large-scale emergency where you have to vacate your home, how easily could you assemble the paperwork that mattered?  Would you even be able to tell the difference between what you needed and what you could leave behind?  There are similar considerations in the event of a fire destroying your home.  What steps have you taken to preserve important financial documents now to ensure you can always access them in the future?

There are a couple of possible solutions to consider.  You could invest in a fire-proof document safe for your home.  These are not infallible, but they do offer a degree of protection against losing your financial paperwork.

An alternative option to consider is scanning all of your paperwork and keeping these copies 'off-site'.  This is my preferred option and I make use of a secure online storage solution which is regularly updated.  I also keep a CD-Rom copy of my scanned financial paperwork at a different property.  Both versions are encrypted to ensure that only I can access them in the future.

Preparing for the very worst

In the event of death, there are only two things you will want to have had in place from a financial planning perspective - adequate life assurance cover and a will.  The life assurance policy will provide much needed capital or income for your family, and the will ensures that your assets are distributed according to your wishes.

These are two incredibly simple things to put in place, yet a high proportion of people continue to die each year without having written a will.  Life assurance requires a brief meeting with a financial adviser to determine your cover requirements, the completion of an application form and occasionally some medical underwriting.

Before rushing to complete a life assurance application, think about the level of cover your family would actually need in the event of your death.  It is also important to consider what cover you might already have in place.  If you are an employee then you might benefit from death-in-service cover.  

Writing your will is also simple, but you should always do this through a solicitor rather than taking the 'DIY' route.  A poorly worded will can create even more trouble and financial aggravation for your family at the time when they need it the least.

Profiting from disaster

The recent flu-scare has seen the share price of some pharmaceutical companies climb with airline and hotel company shares falling in value. This is an area I am not going to discuss, as I consider it to be unethical to try and profit from any form of human tragedy.   

In addition to the moral issues at stake, trying to time the price fluctuations in a particular company or sector as a result of an emergency situation would be nearly impossible to do.  It is far better to invest for the long-term in line with your personal financial objectives and risk profile.

The best time to plan

As you can see from the items covered in this article, preparing your finances for a major emergency involves some relatively straightforward steps.  The best time to complete these steps is today because you never know what is around the next corner.  

If you wait until you feel the importance of building an emergency fund, having some cash at home, backing up your important financial documents, taking out a life assurance policy and writing a will, it will probably be too late to do any of these things.  

We should all prepare for the worst but expect the very best from life.  At least then if the worst does happen, we will be in a better position than we were before to ride out the storm and survive (both from a physical and financial perspective).

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