Hurricanes and Planning for Financial Disaster

College affiliations aside (ahem…Miami), I have a special relationship with hurricanes. While veterans of the Florida hurricane “scene” might still consider me a rookie, I think having personally lived through three or four major storms is a pretty big deal.

As the 2009 hurricane season winds down to an uneventful close, everyone in Florida is breathing a small sigh of relief. Meanwhile, I’m thinking about what I’ve learned from a quiet hurricane season that has a financial application. Quite a bit, I’ve realized.

Unpredictability

The primary characteristic of hurricanes is that they are widely unpredictable. Okay, I lie. They are far more predictable than, say, tornadoes or earthquakes. After all, they usually occur from June through November, and through careful analysis, we are warned days to weeks in advance.

Having said that – even with forewarning, and unless your home has wheels, there’s not much you can do to avoid a hurricane. Once it’s ready and spinning, it will make its way slowly and mockingly to the coast and slam in with all its fury.

It’s not a stretch to liken a hurricane to a financial storm. We know that they come around once in a while, but we know neither the intensity of the future season, nor the strength or landing site of individual hurricanes. And we can usually get a little warning to prepare.

Can we actually learn something useful from hurricanes? I think so:

Long-Range Planning

Preparation for hurricanes begins long before each season. Purchasing flood insurance, upgrading hurricane shutters or new roof materials, and getting a generator in place are all great ways to get ready. Once a hurricane is physically approaching, these tasks are almost impossible to get done – both because of time constraints and because everyone else is trying to do them, too. It’s too late.

Building a strong “foundation” is imperative to getting through a hurricane with as little damage as possible. Here are a few ways we can build a good financial foundation:

• Save an emergency fund adequate enough to cover unexpected disasters.
• Prepare living wills and other legal documents that communicate your intentions during a medical emergency.
• Evaluate your insurance needs long before you think you’ll need the benefits.
• Decrease your expenses and increase your income to keep the “freedom gap” large.
• Take care of your credit score, even if you never plan on getting credit.
• Predict regular, large expenses conservatively, like your tax bill or yearly insurance.
• Stay one step ahead of problems by using last month’s income (YNAB Rule 1) for this month’s expenses.
• Don’t lock yourself into loan payments for the long term.
• Automate critical portions of your finances that must go on in case of emergency (like a power outage or urgent trip out of town).

Short-Range Planning

Without adequate long-term preparation, scrambling to get ready for a hurricane is superficial at best. Prepared or not, some last-minute tasks must be completed, like gathering food and water, ensuring equipment like generators and flashlights are ready to function, and boarding up the house with shutters or plywood.

When a financial storm approaches, we often get some warning. In that span of time, there are things that need to get done, like:

• Evaluating options for handling the situation in the best way possible.
• Transferring money between accounts to prepare for a large expense.
• Selling assets like stocks and bonds to free up cash for spending.
• Activating consumer protections, like credit freezes, if you believe something has been compromised.
• Shedding discretionary expenses, temporarily or permanently, to open up room in the household budget.

Surviving the Storm

Getting through the actual eye of the storm is mostly a passive process. It involves a lot of sitting and waiting, some sleeping, and some more sitting and waiting. Unlike a tornado or an earthquake, where the event is over in minutes or sometimes seconds, a good hurricane event can last for 24-48 hours.

Nevertheless, when water starts leaking into your house, the wind blows out your window, or the power goes out, you have to react. How do we get through financial storms with minimal damage?

• Rely on the strength of your long-term plan, while reacting carefully to the uniqueness of the situation at hand.
• Avoid burning through your resources too quickly, even when you’re in “panic” mode – you have to make them last.
• Don’t pay for urgency if you can avoid it – deal with the situation in the most reasonable way possible.
• If possible, use cash for your expenses – swiping away on a credit card when you’re under stress is not a good idea.

The Recovery Process

The stronger your long-rage planning, the less damage there is to clean up after the storm. Well-trimmed trees won’t blow around branches, a reinforced roof won’t peel off, and a power outage can be remedied by a working generator.

But even the best planning can’t stand up to a strong storm, and you’ll ultimately have to do some clean-up. In addition, your neighbor may not have been so proactive, and some of his roof tiles went flying through your porch screen. Go figure.

What can we apply in the financial recovery process?

• Evaluate the extent of the financial damage caused by your situation.
• Determine if your pre-planning efforts, like an emergency fund, were adequate to cover any resulting expenses.
• Catch up on anything you’ve neglected in the process, like unpaid bills.
• Channel money back into remote accounts and re-purchase any assets you shed.
• Figure out the extent to which you have to rebuild your reserves and make a plan.
• Write down what you learned through the situation that can help in the future.

Hurricanes are ferocious and unpredictable, much like the financial storms that ravage our lives. With a little planning, we can be better-prepared to deal with the problems and the aftermath.

And when it seems like everything around you is falling down, just remember this classic quote from The Dark Knight –

“The night is darkest just before the dawn.”

Photo credit: PhillipC via CC 2.0