Why do people build or live in areas prone to natural disasters such as flood, hurricanes or wild land fires? This was the topic of conversation for a former Federal Emergency Management Agency (FEMA) Chief, Brock Long, at a recent financial planning conference. Mr. Long helped lead the development of a new emergency management road map for FEMA which included building a culture of preparedness which included financial wellness. He led through two tough years of some of the worst natural disasters – Hurricanes Harvey, Irma, Florence, Michael and Maria, and the California wild land fires.
Emergencies happen and FEMA and other agencies respond with community lifelines including safety and security, food, water and shelter, health and medical, power and fuel, communications, transportation, and more. However, individuals need to be prepared financially as well.
Most families don’t have $1,000 in savings to cover an emergency per Bankrate’s January Financial Security Index. About one in three respondents said they or an immediate family incurred at least one major expense in the past year and 36 percent of those said the largest unexpected bill was $5,000 or more. In addition, suppose you lost your home to a disaster – lost all possessions, had no insurance coverage and turned to FEMA. Did you know that the average FEMA grant to victims is $3,000 to $4,000 (to replace the house and contents), the maximum grant is approximately $33,000, and the homeowner still needs to pay off the mortgage? That’s a band-aid at best.
Many people live in disaster-prone areas because they have the belief that they won’t get flooded or a tree won’t fall on their house – “bad things don’t happen to me; they happen to other people.” Similarly, people assume life transitions such as job loss, illness, divorce, and death only happen to others. We like to believe that we make rational and logical decisions. However, we’re also human and thus can make decisions based on emotions or biases. We are rationally irrational. This type of cognitive bias that can distort our thinking – tree won’t fall on me – is called the optimism bias. We can overestimate the likelihood that good things happen to us, and understate the probability of negative events. Experts say we can’t always avoid our biases; however, we can be aware they exist, and they can lead to poor life decisions.
So, how can we be better prepared financially to achieve our goals in life, and protect us for the possibility of storms in our path?
Have a written plan
A comprehensive financial plan serves as your road map reminding you of your desired destination, the actions required to get there, and a process on making the occasional detour along the way. It also gets reviewed and updated.
Build emergency reserves
Sixty percent of people in the Bankrate survey did not have $1,000 in savings. Faced with a $1,000 emergency expense, 15 percent said they would put the charge on a credit card, 13 percent said they would borrow from a friend or family, and six percent said they would take out a personal loan. Emergencies happen and building a rainy-day fund through budgeting can help keep household finances on track. Funds can be held in a savings or an online money market account paying competitive interest rates, or you can secure your cash in a safe place.
Have the right insurance coverage for the hazards you may face. Periodically review your plan as your situation may change and make sure it is competitively priced. Mr. Long also recommends reviewing flood and earthquake coverage. More damage is caused in a hurricane from rising water than by wind, and Mother Nature doesn’t recognize flood zone maps. Also, protect your earning potential with adequate disability and life insurance.
This applies to investment strategies and developing multiple sources of cash flow. We have been drilled not to have all our eggs in one basket to (a) earn the required return to achieve our goals and (b) “smooth” those returns – trade “never make a killing” for the eternal blessing of “never getting killed.” Also diversify the cash flow sources whether it is in business, having a side gig, or multiple checks in retirement (Social Security, pension, IRA distributions, etc. and subject to various tax treatments).
Recognize that life changes (life stages and transitions, and business and market cycles) and adjust accordingly. For example, next month will mark the longest modern-day expansion but it has also been the weakest (cumulative post-recession GDP). Forecasters predict lower returns.
I respect the former FEMA Director’s push for Americans to develop a true culture of preparedness. I also better understand the frustrations of “the tree won’t fall on me” realities – outdated building codes, living in New Orleans without flood insurance, lack of three days of supplies, and those with “liquidity time bombs.” One of our roles as financial advisor is to continue to educate and nudge on best practices.
This article can also be viewed at the Reno Gazette Journal.