14 June 2013

3 Tools for Dealing with the Unexpected

Over the last several months, it seems that we have been increasingly hit by major events that dramatically alter life for us all, some more directly than others. Just within the last year or so, we've had several mass shooters, inclement weather events, and general industrial accidents. Some had a little more warning than others, but all were still not particularly welcome.

All of these events reinforce one point: nothing is promised. Disability and serious injury or even death can come to any of us or a loved one at almost any time. Life can change dramatically in a matter of seconds. One minute everything is fine, the next a total disaster. I might never even get the chance to hit "Publish" so you can read these words.

I don't say all this to instill fear in everyone, but to encourage. Any significant life event has a certain level of risk and uncertainty, but those risks can be greatly minimized. There are three tools available to help minimize risk and help in the aftermath should something occur: emergency funds, insurance and warranties, and estate planning all go a long way in ensuring that. Let's look at how.

Keep funds on hand for emergencies.

Emergency Fund

This is a perpetual hot topic among personal finance bloggers and writers everywhere. The mainstream wisdom is that anyone having less than 3-6 months worth of living expenses on hand in a money market account is a fool living dangerously. That view varies across the PF world, from those who fully support it to those who snub their 'Staches at it. Pick something that works for you, but pick something. Savings for the short term never hurt anybody, and a "layered" approach that spreads access risk while also keeping various levels of liquidity might be a great idea to emulate.

While having a fund is great, there is another component to emergency funding: reduce the need for it to begin with. Having the $1500 on hand to pay for a transmission repair is great. Not having to get the transmission repaired because you live a life where you don't need the car for every single trip is even better. That means you can now redirect that $1500 towards debt or building income. The same principle applies for many other "emergencies".

Insurance & Warranties

Dovetailing onto an emergency fund are insurance and warranties. Essentially, insurance is you paying someone else to maintain an emergency fund for you*. Every month (or whenever), you send them some money with the agreement that if something happens, they'll pay out a certain amount as necessary to cover it. But unlike your emergency fund, your policy might lapse if you miss a payment. Then the company gets to not pay out your claim and still keep your money you've already paid. Maybe you're all current with your payments, but you submit a claim and they deny it.

Even if they do agree to pay, a claims adjuster is often sent out. Don't be confused. The role of the claims adjuster is to find some way to deny your claim in part or in full. The less money the company has to pay out to you, the more profit they have and thus the more shareholder profit and value they can provide. That's because many insurance providers are corporations, meaning they're required by law to enhance value and make a profit for the shareholders or face a lawsuit. And even non-profits can't perpetually operate in the red. That means they charge you far more than it costs to maintain the fund.

What does that mean for you? Pick wisely based on actual needs, not just marketing. People will try to get you to buy insurance on everything, but evaluating the realities are usually helpful. (I was offered a $2.99 warranty plan on a memory card. The memory card was $6, and the warranty didn't include data recovery.) Popular categories include aircraft, auto, disability (including specific body parts), health, house, life, pets, and any other significant life event or ownership opportunity as well as a host of more superfluous occurrences.

Estate Planning

Finally, there's estate planning. Though life insurance is certainly a component of estate planning worth considering, it shouldn't be the entire extent of your planning! In the unfortunate event that you join the ranks of the dearly departed, what happens in the aftermath will have lasting effects on those who may depend on you. How you prepare beforehand determines if they'll be good or bad.

While dying without a will isn't illegal, it can certainly cause headaches for the family and relatives or at least leave people confused. Following principles of frugality and saving generally lead to elevated fortune, so what happens after you're gone should be planned for as judiciously as planning for FIRE was.

Some areas are relatively simple. Choose a final resting place, funeral home, etc. ahead of time and pay for them to avoid familial conflicts, especially if your family has multiple branches from different areas. Others are far more complicated and depend on a whole host of variables. However, the final state of your finances is even more important than getting your funeral figured out.

Ideally, get all debts paid off. But, we can't all choose when to die. You might have just started on the journey and still have a ton of debt to eliminate. Make sure you and your family know what happens to it legally. It isn't unheard of for debt collectors to contact the family of the deceased trying to collect on bills that they should instead write off. (Which they may actually do, but try to collect anyway hoping you're unaware.) Of course, life insurance is available that'll pay out your family the value of the policy, which hopefully is enough to cover the debt and the grieving period.

But once again, life insurance is still insurance. In other words, you're again paying a company to save money for you. It's a good thing to have around "just in case", especially when younger, but don't prioritize a big insurance policy over eliminating debt. Sending hundreds of dollars a month to line an executive's pockets is not better than instead paying down your debts then putting money that aside for your family to use if need be.

In the future, I'll explore each of these ideas again separately in greater detail. Thousands of dollars and years of your time are at stake, so making the most of those is what we want to do.

Image sourced from Tax Credits on Flickr.

*Exhibit A: CA auto insurance requirements. One can either pay a company to provide the minimum amount of coverage or earmark $35k of their own money in the case of a collision. The average cost in CA for the minimum liability insurance from a company looks to be hovering around $750 annually for the last several years. That might not sound like an extreme amount, but a less than spotless driving record can make that go up in a hurry. Over 10 years, that's ~$8k paid out. However, the bond requirement has been $35k for at least 10 years. Anyone who has put up the bond hasn't had to worry about their insurance premium changing at all, no matter their driving record or car.

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