May 11, 2015

Financial Lessons from Emergency Response Training

Along with 70 other San Franciscans, my wife and I recently completed NERT training. As Neighborhood Emergency Response Team volunteers, we would assist the San Francisco Fire Department and our community in case of disaster. Much of what we learned about responding to earthquakes and fires can also apply to financial lessons for the management of personal finance disasters.

Personalize It

A key to disaster survival is to have plan. The plan should be personalized to your circumstances. As NERT volunteers in San Francisco, we focused more on earthquakes. If we were in New Orleans, we would have emphasized flooding. A recent college graduate loaded with student loans should plan differently than a classmate with no debt. A person working at a startup in need of funding should plan differently than an engineer at an established company with steady income. Similarly, retirement saving for someone living in an area with high housing costs may need to be very different from someone in an area with low housing costs.

Build an Emergency Plan

Planning ahead for emergencies has its benefits. It can prevent a lot stress and bad decisions when bad things happen. Thinking through your responses to a few simple questions will assess how well prepared you are. For example, what would you do financially if you were out of work for an extended period? When would your action plan make sense and when wouldn’t it? Do you have a reliable source of resources to carry out your plan?

In NERT training, we practiced what should be done for protection during an earthquake and escape routes for fire. We reviewed what to include in our emergency kit to survive for 3-days, the expected time to get assistance. In case of a financial emergency such as a sudden loss of income from a layoff or illness, how would you protect yourself? What financial resources can you count on to give you time to find a new job or heal? In my opinion, good answers include a balance between savings and investments, insurance, other jobs or alternative sources of income such as dividends, interest, rental property and others. Less preferred solutions are borrowing money at high rates or being forced to sell assets to raise cash. With our Dashboard tool, or clients can organize their finances so they can keep track of their resources. We help them understand their resources and how they can be used in difficult times.

Establish Emergency Reserves

Emergency reserves allow you to recover from a bad situation. NERT instructors prescribed an emergency kit with essential items such as water, food that you normally eat, suitable clothing, personal items such as medication and others. The goal for emergency savings is similar. The savings should be sufficient to cover payments for essentials such as food, utilities and mortgage payments. The funds can be used to cover unexpected home repair or medical expenses. Personalization is important. A kit with bad food, ill fitting clothes or insufficient funds will only make a bad situation worse.

Emergency savings should be held in a form that is safe and readily accessible on short notice. Cash and FDIC insured bank accounts are common ways to save.

How Much is Enough

How much is reserved for emergencies depends on the types of emergencies that you are trying to cover. For loss of income, three to six months may make sense if that is how long you believe it will take you to find a new job. It is important to review savings to reflect the times. The median time for unemployment is currently 11.7 weeks but was as high as 25.2 weeks in 2010 according to the Labor Department. Three to six months is also a common wait period for long-term disability insurance. If you’re pursuing something entrepreneurial, you may need a very different plan altogether. The three to six month target is a good starting point. For greater context and precision, I would prioritize and quantify spending needs.

Develop Good habits

The process of building emergency savings can instill good habits. A popular saying is to “pay yourself first.” Another is “out of sight, out of mind.” Strategies such as automatic paycheck deductions into separate accounts can go a long way to save in general and to build emergency reserves. Automatic deductions for 401(k) is an example for how many are making progress with their retirement nest eggs. In an earlier post, I discussed how good savings habits that make use of both savings can help someone accumulate $1 million in their 401(k) account.

Ways Avoid Bad Decisions in Times of Stress

Knowledge and comfort with a personal plan can prevent injury and support recovery. Panic and running outside during an earthquake often results in injury from falling debris. Reacting out of fear during a financial crisis often has similar results.

In either situation, try to stay calm and to find safe cover during the crisis. It is hard to predict when and how quakes will strike. To mitigate damage during an earthquake, a home can be reinforced by bolting a house to its foundation and adding cripple wall shear support. For a financial quake, personal finances can be reinforced with insurance, multiple sources of income, a diversified investment portfolio that is rebalanced regularly.

In recovery, it is hard to predict ahead of time, which holdings will recover faster or fully. Diversification helps increase the chances of participating in a rebound and limiting the damage of segments that don’t.

Have a process to assess the damage. In NERT, we practiced a logical process of sizing up a situation and following a pre-agreed upon protocol in conducting the search. The instructors stressed the need to keep focus and avoid distractions. This process helps maintain organization and safety in uncertain situations.

Following a logical process would have helped many people during the Great Recession of 2007-2010. During this period, 9 million jobs were lost. Home prices fell. Investment portfolios collapsed. Household net worth fell by $16 trillion. Many people panicked. With much thought to their investment time horizon, they responded by selling their holdings indiscriminately. They were effectively “throwing the baby out with the bath water.” Instead, they held cash and did not look back, only to miss out on the recovery that ensued. Our philosophy is to apply the logical process in an Investment Policy Statement that we tailor for each of our investment advisory clients.

NERT emphasizes safety in helping victims survive and recover from disasters. Many of the lessons taught in NERT training also apply for survival and recovery from financial disasters.




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