Having an emergency fund is a great strategy for pretty much everyone. But there are things that can happen in people’s lives that create emergencies that the recommended 4-6x month’s expenses simply cannot cover.
Some examples of emergencies with extreme financial consequences include the loss of a home to a fire or natural disaster, a medical emergency in another country, or failure of a major system in the home, like replacing the foundation for an entire home. These are just a few examples of emergencies that may come with very high price tags, and while some, if not all, should be covered by some form of insurance, that doesn’t mean they are. Even for those catastrophes that are covered by a policy, there can still be potentially significant financial consequences as people work through the interim between the emergency, the claim being paid, and life returning to normal.
CacheFlo is based in Nova Scotia, and many of our fellow Nova Scotians just had the horrifying experience of being forced to cope with one of these types of emergencies. More than 16,000 people were evacuated from their homes due to wildfires in May. Luckily for many of them, their houses weren’t damaged badly. But that didn’t make their hotel costs, or stress any less. For those who did find their properties badly damaged or destroyed, it will be a long road ahead before they find themselves under a permanent roof again. Hopefully, most of these homes were insured, but that doesn’t mean instant, or enough cash. The hundreds of people whose homes were entire losses will face a lot of complex financial decisions.
When anything happens in our lives, planned or unplanned, that intersects with a lot of decisions, the risk for a lot of financial mistakes is ever present. Here are some of those common mistakes and what to do about them.
When credit (cards) must be used 💳
If employees have to use debt during an extreme emergency, they need to do so with care. Their credit score can be hurt for years if they go over their limit, max out their cards, or miss payments, even if it’s only for a few months. In fact, as soon as a revolving credit facility, like a credit card or unsecured line of credit goes over 80% of the limit, their credit rating is negatively affected. This impact on credit health can make the personal financial fallout from the original emergency that much more intense.
For those facing extreme financial emergencies, they should review all of their open credit, and carefully use it to avoid driving any of the balances over 80% of the limit. They should reach out to creditors to find out if there are any options to stop interest payments, or reduce the interest costs during the emergency. Especially in the case of natural disasters that affect groups of people, institutions may have a program or offering to reduce the impact of temporary debt. But employees won’t get what they don’t ask for. Managing their balance-to-limit ratio, ensuring they notify all creditors of their current situation, and asking about any financial relief programs related to their extreme emergency is crucial to reducing the further impact of the issue.
With all benefits comes some sort of cost. Employees need to know the cost of deferring debt, which is different from offering an interest-free or reduced interest period. Some mortgage providers and lenders will let you defer payments during the crisis or even through the rebuilding process. But employees should ask for a new amortization schedule and the total interest cost before taking this option. They should also ask if they can restart payments during a previously agreed deferral period without any sort of penalty.
Employees should also inquire about any insurance they have on those debts. Does any of it apply to their extreme emergency? Are they paying premiums during a period of deferred interest? Employees may benefit from talking with a licensed insurance agent or broker to find out if there are more cost effective ways to carry life insurance on their debts, for example. You should also make sure your employee financial wellness program covers the topic of creditor insurance.
Waiting on insurance 🛡️
Anyone who’s ever been in a car accident might be impressed with how efficient the response is once they call their insurance company. It’s not fun to be in this situation, but most insurance companies have a very quick and well organized initial response when you call after an accident. But a car accident claim is common enough to ensure that good training and processes are developed. And their volume of claims is manageable, so the company isn’t too overwhelmed to deal with the amount of claims they get.
But when disaster strikes and a larger number of people are impacted, especially within the same geographic area, things can become chaotic within the claims experience. Slow insurers can cause even more stress on top of dealing with the actual emergency.
When it comes to insurance, if someone has lost a home, car or some other kind of property, then calling sooner is usually better. Writing down questions before calling can be helpful, and don’t be afraid to call back if needed. Employees should ask about any limits to coverage, like an amount or number of days or occurrences, in addition to what kind of records they need to keep. It’s also a good idea to ask about any advance on insurance, or interim financing options where expenses may need to be paid before claim dollars are available. Employees should also ask about financing costs. Does their insurance cover the cost of carrying debts they wouldn’t have needed to take on if it wasn’t for the emergency?
Don’t just keep receipts; document everything. Note any changes to your lifestyle while dealing with the emergency, including the time it takes to do extra tasks related to the emergency, as well as if any of those tasks reduced your ability to work. It may not all be taken into account with a claim, but the more documentation you have, the better.
When costs get extreme ⚠️
When someone is dealing with a significant emergency, employees are prone to making more financial mistakes. It’s important to remind employees of any financial wellness resources they have access to even during the emergency, assuming the physical danger has passed. Some money errors will not be fixable if they wait too long.
They may also spend more on basic necessities if they don’t make use of the financial tools in your program. Lots of costs related to extreme emergencies are unavoidable, but that doesn’t mean they don’t have any control over how much they spend on costs they simply must bear.
For those not currently experiencing extreme emergencies, this is a good time for them to review their insurance. Employees nearing retirement may have paid off their mortgage, which means they probably aren’t required to have home insurance anymore, and they may make the mistake of thinking that means they don’t need it anymore. But unless you can afford to replace your home if it burns to the ground or washes away in a flood, you need home insurance. So many bad financial mistakes can be avoided if employees have access to the right information and tools at the right time.
CacheFlo is a financial education company that builds eLearning and tools to help financial professionals and individuals make behaviour-based changes, which allow them to get more life from their money. We want to make it easier for people to predict the impact of their financial choices before they make them.
About the Certified Cash Flow Specialist (CCS) program
CCS professionals go through enhanced cash flow-based training to develop the skill set to deliver behaviour-based cash flow advice. They start the financial planning process with a cash flow plan to genuinely help their clients get more life from their money.
About the Financial Capability Program (FCP)
The FCP combines quick and practical lessons with tools, including Winton, which helps people make financial changes they can stick to. Users can apply what they've learned to their financial situation, thus bridging the knowing-doing gap. The goal of the FCP is to help people get more life from their money.