Oran Hall | Bracing for a financial earthquake
Financial shocks can be as sudden and devastating as a serious earthquake. They can come in the form of the death of a major breadwinner, serious injury, serious investment losses, loss of a valuable asset such as a home, and a divorce, although this is not generally sudden and unexpected
With adequate preparation, however, the fall-out can generally be cushioned.
The death of a major breadwinner – a father, for example – removes a major source of income and puts at risk the ability of dependants to attain a myriad goals, for example, getting a good education. It puts at risk the ability of the family to retain ownership of their home on which there is a mortgage or the ability to buy one.
Add to these the reduced ability of the family to maintain its normal standard of living and the serious disruption in the lives of dependants in the case of sudden death.
Serious injury deprives the injured of the ability to earn and support dependants and puts at risk the ability of the individual and dependants to realise goals within previously determined timelines. And if loss of income is not enough, the costs associated with some injuries are sufficient to wipe out savings while setting back progress.
Serious investment losses and business losses can be devastating too. Sometimes they come out of poor decision-making, but they can also come about from serious shocks in the economy and financial markets.
Sometimes it is not hard to see the headwinds. Other times, it is not so easy. Investment losses, while often devastating, are not necessarily fatal. With time, a good portfolio can bounce back and even a battered business can rise again.
A housing unit and its contents acquired through sacrifice and disciplined saving and investing can become history in a blink of an eye by virtue of an earthquake or a fire that it triggers. The process of rebuilding can be costly in terms of time and money – if indeed rebuilding can be done. Like the other disruptions mentioned previously, this financial earthquake has the potential to derail the financial programme of an individual or even an entire family.
Divorces do not happen overnight, but, generally, they do destroy families beyond repair. Settlements may cause jointly owned family homes to be lost in some way or other to one or both of the former owners. The new family situation often causes higher living expenses and the death of previously established individual and family goals.
In much the same way that some people come out of a natural earthquake largely unscathed while others are ruined, some people fare much better than others when a financial earthquake hits. Some buildings withstand an earthquake because they are well-built – on a strong foundation. Some people fare reasonably well, or recover well, and in good time because of the state of their readiness and the strength of their financial preparation.
Similarly, individuals can smother or reduce the ill-effects of a financial earthquake by building a solid foundation and putting in place measures to insure against the shaking, disturbance, and devastation of a financial earthquake.
To protect their families against fallout from the likelihood of their early demise, breadwinners should consider some form of life insurance to provide a lump sum to replace their income ideally or some portion of it. This should help their dependants to, ideally, continue to live at the standard they have become used to or to continue to live at a reasonable standard.
Additionally, the death benefit should be able to provide for major goals such as the education of the children. If cost is a challenge, term insurance may be considered as it gives more coverage for each premium dollar.
Disability insurance is one way to provide income in the event of disability. Even when it does not replace all of the income of the insured, it can help to ease the financial burden of the family and perhaps provide some funding for medical expenses.
Health insurance can also provide support in the event of sickness or injury as it can cover a meaningful portion of health-related expenses. Private group and individual health insurance can be helpful.
Adequate insurance coverage of residences and contents can also provide protection in the event of fire, floods, storms, and earthquakes.
When financial markets are jolted, they can cause even people with a strong constitution to feel weak-kneed. No investment strategy can give a full 100 per cent protection against investment losses, but a good strategy can limit investment losses. A meaningful diversification strategy is the best form of protection, and this does not mean just investing some funds in one type of asset and more in another type.
Beyond that, having liquid funds is important to meet immediate and emergency needs. This does not necessarily mean just cash, but short-term investments that can be easily liquidated. The habit of generating savings, therefore, is valuable.
When the earth quakes for a few seconds, it can cause far-reaching and long-term consequences. Financial earthquakes do not necessarily come as suddenly, but their consequences can also be long term and far-reaching. Fortunately, insurance and smart financial and investment strategies can ease the shaking and disruption.
Earthquakes – natural and financial – will come, and with various degrees of intensity, with aftershocks, and at various time intervals. A strong foundation is vital to withstand them and reduce the risk of serious harm. Beyond that, a strong emergency plan, good insurance coverage, and an effective and working financial plan are critical to the process of recovery, reconstruction and the continuation of life at a desirable level.
Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com