Are You Prepared For the Unexpected?
November 17, 2016If you’re like me, you may have been quite surprised (whether in a good or bad way) by the election results last week. The fact is that things don’t always go as we expect and sometimes life throws us curve balls. For example, I recently had a trip in which my first flight was delayed, then the Wi-Fi that I had been planning to use to get some work done on my second flight wasn’t working (here’s a different perspective on this), and then I found out my luggage hadn’t made it to my final destination.
Fortunately, I had everything I needed to finish my work (including writing this blog post) on me and the rest was delivered to my hotel by the next morning. The key is to be able to roll with the punches and that’s a lot easier when we’re prepared. The same is true in our financial lives. Here are some preparations for life’s financial curve balls:
Insurance
Knowing how my travel day had gone, I opted for the more complete supplemental liability insurance for my rental car. I knew the odds of an at-fault accident were low, but it could happen and being carless, I have no other insurance. That means I could be personally liable for thousands or even hundreds of thousands of dollars in damages in the event of an accident.
Insurance is for those unlikely but disastrous events that could leave us financially debilitated. (If the event is likely, the insurance wouldn’t make financial sense for the insurance company and if the event wouldn’t be disastrous, the insurance wouldn’t make financial sense for you.) Make sure you have enough property and casualty insurance to replace your valuables and to cover your assets in case you’re held liable for damages. That may mean having an umbrella liability policy if the limits on your auto and homeowners insurance are too low. Don’t forget health, disability, life, and perhaps long term care insurance too.
Emergency Fund
If insurance covers the unlikely events, the emergency fund is also for all the things we know will happen but can’t predict when. Your home and car will need repairs. You’ll have out-of-pocket medical expenses. You’ll probably be in between jobs at some point. If you don’t have adequate emergency savings (ideally enough savings and other supplies to get you through at least 3-6 months), you may end up having to borrow the money at astronomical interest rates or even worse, losing your home or car if you can’t make the payments.
Advance Health Care Directive and Durable Power of Attorney
These documents specify your wishes or delegate someone to make those decisions for you in case you’re unable to. You can get advance health care directives drafted and stored for free at My Directives. A durable power of attorney is relatively inexpensive or you may be able to get it for free as an employee benefit.
Investment Diversification
Just like things don’t always go as we expect in our personal lives, the same is true for the overall economy as well. That’s why we diversify our investments. Have at least 30 different stocks in various sectors (if you have a mutual fund, you probably already have this) with no more than 10-15% of your portfolio in any one stock (especially your employer’s). You may want to include bonds, cash, and even alternative asset classes in your portfolio like real estate and commodities as well. Even the most diversified portfolio can lose value but by holding for the long term (at least 3-5 years), you also diversify by time and so the good years can make up for the bad ones.
Just because most of the political or financial experts predict an outcome doesn’t mean they’ll always be right. Life has a way of making fools of us all. When it does, you’ll want to be prepared.