Get yourself prepared

Planning is key in getting through emergencies

Your Money

September 18, 2005|By Andrew Leckey

For those who aren't directly affected, worst-case scenarios such as the deep personal tragedy caused by Hurricane Katrina can affect behavior in a couple of ways:

We can breathe a sigh of relief that nothing like that happened to us.

We can think realistically about how well-equipped our own family would be to deal with any type of serious financial emergency.

The second response makes good sense. The savings rate of Americans is at its lowest level in decades, revolving credit balances continue to grow, home equity is being eaten up by borrowing, and bankruptcy laws are becoming tougher.

Planning ahead for emergencies is vital, experts said.

"Every family absolutely needs an emergency fund," said Suzee Ackermann, whose family of five was unharmed in a fire that burned their home in San Rafael, Calif., several years ago. "I remember rushing out one day to buy basic family necessities from brooms to dishwashing soap, aspirin, Band-Aids and flour, and the bill came to $900."

Besides that financial safety net for the unexpected, every family's overall investment mix, financial records and insurance policies should be reviewed periodically.

"Need is need, and the need to come up with cash extends beyond hurricanes and tornadoes to include illnesses, lost jobs, divorces, business changes or new opportunities," said Guy Cumbie, a certified financial planner and principal of Cumbie Advisory Services in Fort Worth, Texas. "We strongly advise all of our clients to keep emergency cash reserves of six months of income, which does intimidate most people."

That rule of thumb is readily accepted by clients with irregular income patterns, including sales positions and those who own their businesses, Cumbie said. While they've factored uncertainty into their lives, others should too.

Many planners say an emergency fund equal to three months of income or living expenses is the minimum for a working person, or a full year of living expenses for a retiree. Consider your debt load when determining this. Study your spending patterns to figure out how much you can save toward your emergency fund and pay it automatically each month, as you would a utility bill.

This must be liquid, safe money in short-term bond funds or short-term bank certificates of deposit. Money market mutual funds and bank money market accounts tend to have lower yields but fill the bill. Shop for the best rates and avoid those that shrink after an introductory period.

Don't borrow from 401(k) or other retirement accounts, since that defeats their purpose. Your emergency fund also must be kept separate from other investments and shouldn't be pilfered for incidentals.

Experts also urge people to avoid a regional crisis in their investments.

"Hurricane Katrina and other disasters point up the wisdom of having a geographically diverse portfolio in both your stocks and bonds," said Marilyn Capelli Dimitroff, a certified financial planner and president of Capelli Financial Services in Bloomfield Hills, Mich. "People often have virtually all their money invested in their local utility, a local company or their own state, but for protection they should also be investing elsewhere."

For example, debt of Louisiana; Mississippi; New Orleans; Biloxi, Miss.; and other affected areas were put on credit watch by rating agencies after the hurricane.

Emergencies also drive home the importance of safekeeping financial records.

"We had backed up our computers and kept a copy of financial records at the office, at my home and the home of our office manager," said Ray Ferrara, chief executive of ProVise Management Group LLC in Clearwater, Fla. "Then Hurricane Andrew came along and, once we saw how it flattened everything in its path, we realized we needed a much more secure location, such as a bank vault."

Don't keep all your records in the house. Put important data on computer discs to be kept elsewhere or use an online service that will safely store your important information.

Keep important original documents such as birth certificates and deeds in a bank safe-deposit box. Other valuables can go in a fireproof home safety box. Have a small amount of cash or traveler's checks at home where you can get it quickly.

Review your homeowner's or rental insurance each year to make sure it is adequate and that you know what is covered. With construction costs up, insurance held by many homeowners isn't enough to rebuild, Capelli Dimitroff said.

Take an inventory of possessions with photographs or videotape. Store the records away from your home.

If you encounter a worst-case scenario, it's important to note that personal bankruptcy is getting tougher, with a new law taking effect Oct. 17 making it harder for individuals to clear their debts. More people will have to file under Chapter 13, going on a repayment plan of up to five years, instead of the Chapter 7 "fresh start" in which some assets are liquidated and given to creditors, and many remaining debts are canceled.

If you require a financial planner to get organized, make a get-acquainted visit to gauge your compatibility.

Ask about the charge for a financial plan, whether the planner sells financial products and whether you'll receive a written client engagement agreement that clearly states the specific terms and scope of services you'll receive.

The certified financial planner ( and the insurance industry's chartered financial consultant ( are professional designations requiring examinations, experience and continuing education.

Relate your personal concerns right away.

"We always sit down with our clients and ask, `What are the dangers you might face?' " Capelli Dimitroff said. "People must think seriously about that."

Andrew Leckey is a Tribune Media Services columnist.

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