Preparing Your Budget for a Disaster

Natural disasters and other emergencies can occur quickly and unexpectedly, and their effects can have a long-lasting impact on your family and your finances. While no one likes thinking about worst case scenarios, being prepared for difficult circumstances ahead of time can drastically improve your ability to recover from events such as a tornado, flood, or even a house fire. Here, we’ll share a few tips on how you can batten down the hatches on your finances to help you weather any storm.

Make Sure You Have Good Insurance Coverage

Perhaps the best way to prepare for a disaster is to have the appropriate amount of insurance in place, either renter’s insurance or homeowner’s insurance.

Renter’s Insurance Can Help

If you rent an apartment and it’s damaged in a disaster, your landlord’s insurance is not going to cover any of your belongings, your housing, or any loss specific to you. This is surprising to a lot of folks, but it’s true! Your landlord has different insurance for the actual property, but their policy is not designed or meant to cover any of your property or loss.

Renter’s insurance, on the other hand, offers coverage for your belongings, replacement housing, and food costs if you (and your housing) experience a disaster. Every insurance carrier is different, with specific disasters they cover and exclusions. Depending on the carrier, you can even customize your coverage. Don’t assume that your insurance policy covers an item or offers a service—it’s important to ask questions and read the fine print! If your in a flood or wildfire zone, it’s even more important to ask questions and confirm what they will (and will not) cover.

Check Your Home Insurance

Most Americans are underinsured when it comes to home insurance. A recent survey by the American Property Casualty Insurance Association (APCIA) found that only about 30 percent of homeowners have taken steps to increase their coverage amount to keep pace with rising inflation and building costs. Meanwhile, only 40 percent of homeowners have updated their home insurance to account for renovations or remodels.

Should you at some point need to rebuild your home in the wake of a disaster, it’s a good idea to consult your insurance agent or company about a few features:

• Replacement cost coverage. This coverage would provide the funds to rebuild your home with similar materials to what you already have at current market rates, as well as replace any personal belongings you might lose in case of a disaster.
• Automatic inflation guard. With inflation at a historic high, this is a key feature to investigate. With an automatic inflation guard coverage, your home insurance will automatically adjust the amount of coverage each time it renews. This helps keep up with rising costs and will also help ensure that you have enough coverage to pay to rebuild your home as construction costs continue to rise.
• Building code/ordinance coverage. Many cities have begun to introduce new building codes to encourage residents to implement energy saving measures in their homes. This feature increases your insurance coverage to ensure you will be able to bear the costs of complying building codes or green energy ordinances should you need to rebuild.
• Extended replacement cost coverage. This is particularly important, should your home be impacted by a widespread and serious natural disaster, as it increases the coverage available to rebuild your home if labor and material costs skyrocket due to increased demand after a natural disaster.
• Additional living expense (ALE) coverage. This is an option type of coverage that provides higher limits to cover hotel and food costs if you are unable to live in your home. This is useful if you need coverage for longer—for example, if your house needs to be rebuilt after a disaster.

Build Up Your Emergency Fund

It’s been said many times, but the importance of an emergency fund cannot be understated. Most experts recommend having enough saved to cover between three to six months of expenses. That means if your monthly expenses are $3,000, you should have $9,000 to $18,000 stashed away for a rainy (or disastrous) day.

In the context of an unexpected disaster, it’s important to make sure your emergency fund has enough to cover expenses beyond the ordinary mortgage payments and utility bills. After all, unexpected costs can happen with unexpected events. You’ll want to avoid taking on a large amount of debt that can grow significantly larger than the original bill due to fees and interest.

An emergency fund may also need to stretch beyond a single disruption. If your home is affected by a disaster, the insurance company is going to need time to assess the situation and disperse money. You will need a way to cover housing, food, and even transportation while you’re waiting.

Protect Important Information

Safeguarding important personal and financial information is a step that many people may miss when it comes to preparing for a disaster. Take the time to document contact numbers for financial institutions where you have an account, as well as your insurance providers, before an emergency strikes. It’s also a good idea to make a master list of bank account numbers, valuables, medical information, and more. This list should be kept in a safe and accessible place (a water-and-fire proof box, for example).

While many of us have most of our most important information stored online or in the cloud, there are physical items that really should be protected. For instance, be sure to keep things like your Social Security Card and some form of personal ID—birth certificates, passports, or driver’s licenses—in a location that can withstand the elements. Fireproof boxes and bags are an inexpensive option to store such items at your home, or you may opt for a safety deposit box at a bank.

Make a Plan

Having all the pieces in place to deal with an emergency is only useful if you have a plan to put them into action. After a disaster, there are a few steps that should be part of any recovery plan:

• Call your insurance company. If your home or car was damaged in a disaster, the first step to take is to let your insurance company know. The earlier you start the claims process, the faster you’ll receive reimbursement for the damage done to your property.
• Contact your mortgage lender. If you have an emergency fund, now is the time to use it. But if you find yourself struggling to make payments due to a lack of consistent income or other financial difficulties, it’s a good idea to contact your lender to see if they have any disaster relief programs that could help you through a difficult time—such as forbearance or a moratorium on foreclosure.
• Contact your credit card companies. Again, in a best-case scenario, your emergency fund would cover any upcoming debt payments even if your income is impacted by a disaster. But, if you find that it’s not possible to pay all your creditors, it’s a good idea to contact them and explain your situation. Sometimes they may waive interest and late fees or allow you to pause monthly payments until you’re back on your feet.

Find the Calm in the Storm

By preparing your finances before disaster strikes, you’ll be better equipped to weather a storm—literal or figurative. Having the pieces in place to protect your financial health can help ensure you’re able to focus on what matters most: you and your family’s safety and well-being.