How to disaster-proof your finances

The devastation caused by Hurricane Katrina illustrates all too well that disasters can strike with little if any warning. As is often the case in natural disasters, people were forced to abandon their homes on short notice. And unless they had made plans in advance, chances are that those people are now struggling financially as well as emotionally.

Unfortunately, most people tend to do nothing until they hear the warning signal, says Amy Boohaker, a certified financial planner and attorney in Sarasota, Fla.

“A lot of people here in Florida learned the hard way when Hurricane Ivan hit last year that being prepared means you have to have everything in hand while everyone else is running around in a panic," she said.

You can't control Mother Nature, but you can take precautions to be financially prepared. Here are some tips for shoring up your finances in case the weather takes a turn for the worst:

Open an emergency savings account
Keep enough savings to cover at least three months’ worth of living expenses in an easily accessible account, such as a savings or money market account. Also keep a credit card solely designated for emergency use, says Boohaker.

“Make sure it has a large enough line of credit to tide you over for at least a few months so you don’t have to worry if your life doesn’t return to normal for a while," she says. It’s also worth keeping a stash of cash or travelers checks and a roll of quarters nearby in case a Katrina-type disaster knocks out power and makes your ATM, cell phone and credit card useless.

The long-term emergency option is to open a home equity line of credit, says Holden Lewis, a senior reporter at Bankrate.com “If you are going need to need living expenses for a year, and the credit card or your savings won’t stretch that far, home equity can be used as an emergency line of credit that gives you more flexibility," he says.

Make sure you’re properly insured
Finding out that you don’t have adequate insurance after disaster strikes will make matters much worse. Make sure that you have the appropriate amount of homeowners, life, car and disability insurance. Depending on where you live, you may also need extra insurance for natural disasters such as earthquakes or floods, which are not covered by typical homeowners policies.

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Also make sure you understand what your insurance covers and know the difference between full and partial coverage. Renters, this applies to you, too, says Abat Kendall, director of financial planning for the American Institute of Certified Public Accountants in New York City. “It’s relatively cheap and will give you access to shelter if your rental is damaged.” Kendall also advises homeowners to go the extra mile to protect their property from fire and high winds by clearing surrounding brush and trimming trees near their house. Your local fire department can help you determine the best plan for hazard removal.

Store documents in a safe place
Keep all your important paperwork in one safe place, preferably a waterproof, fireproof box. Must-have documents include the title to your home and car, insurance policies, bank account numbers, recent tax returns, a copy of your will, and marriage, birth and death certificates. A safe deposit box at a bank is a good spot, but keep your family members in the loop beforehand. “Make sure they have knowledge of and access to the box. Otherwise it does them no good if something happens to you,” says Boohaker.

Inventory your household
One of the most important documents to have is a complete list of all your possessions in the event that your house is damaged or destroyed. An inventory will help you get a fair and speedy insurance payment and shows proof when you want to deduct your losses on your tax return.

“After the disaster hits, people who have lists of what they had are the first ones to get their money from the insurance company,” says Ken Strauss, a CPA and certified financial planner for Berkowitz, Dick, Pollack & Brant in Fort Lauderdale.

Go around your house with a video camera to document every room and possessions, and include your vehicles and the house exteriors on film. Strauss also advises tracking receipts for every item you have bought on a computer spreadsheet, and placing backups of the file and videotape in a site outside your home (a safe deposit box, storage facility or a relative’s house are safe bets).

Contact your creditors first
In case disaster strikes, don’t assume your creditors will automatically defer your payments —you need to let them know you’ve been affected. Be especially vigilant about automatic withdrawals, says Strauss. “Most institutions don’t intervene in automatic withdrawals unless you call and request that your payments be deferred.”

Besides your credit card company, make calls to your utility companies, mortgage lender and other collectors to ask them for extensions. “Most lenders voluntarily give extensions and are very amenable,” says Boohaker. “When they see the damage that’s been done, they’ll realize you need some time to get back on your feet.”

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