Whether it’s from natural disasters, economic recessions or personal crises, financial hardship can strike at any time and with little warning.
Even though it’s not possible to be prepared for every disaster, you can build resilience by creating an emergency budget, setting aside emergency funds and knowing what your insurance policy covers.
Create an Emergency Budget
Your health and safety are first priorities after a disaster, but your financial resilience is critical too. During a crisis, you may lose employment or have a disruption in your income, and these changes may be short-lived or long-term.
Having an emergency budget, or crisis budget, allows you to react quickly if you are affected by a disaster. Plus, households that have emergency budgets in place tend to fare better overall.
If you haven’t established an emergency budget, try to develop one:
Set Aside Emergency Savings
Emergency savings provide security in case of an emergency. The goal is to build enough savings to have three to six months of coverage for regular expenses set aside.
You should keep your emergency funds separate from a regular savings account, and you shouldn’t touch your emergency savings unless there’s an extreme need.
Putting several months of expenses into a reserve account can be difficult to achieve, especially during difficult times. Do the absolute best you can to build an emergency fund first, before saving for other items that are of lesser importance.
Know What Your Insurance Covers
Whether you rent or own, having adequate homeowners or renters insurance will ensure that you're protected in times of need. The extent of your insurance coverage will depend on where you live and what types of disasters your location may be at risk for.
Read your insurance policy carefully to learn what it does and does not cover.
Standard homeowners insurance policies cover a wide variety of situations, but you may need to add disaster-specific coverage to your policy. For example, if you live in a special flood hazard area (SFHA), you’re required by law to obtain flood insurance if you have a federally backed mortgage on your home.
This applies to renters as well. Flooding is not generally covered by renters insurance, so if you rent in an area at risk of flooding, consider a separate flood insurance policy in addition to your current renters insurance.
Here are a few best practices when it comes to insurance and disasters:
- Know your policy. Review your policy annually so that you know what’s covered and if you need to make changes or additions.
- Consider extra coverage. Consider adding extra coverage if you live in a high-risk area. See First Street Foundation’s Flood Factor™ website to look up your home’s flood risk.
- Set aside funds for your deductible. It’s best to keep the amount of your insurance deductible available in your savings.
Talk with your insurance agent to make sure you have the right type and amount of coverage for your personal situation.
Preparation is key to building financial resilience and being able to bounce back as quickly as possible after a crisis.To learn more about preparing from and recovering from a disaster, visit My Home by Freddie Mac®.