Tax Article - 5 Easy Steps to Creating a Financial Disaster Recovery Plan


Whether a massive flood that affects thousands or a sudden illness that affects only you, should disaster strike, your financial solvency could very well depend on whether you have a clear strategy in place for paying the bills. Here are five easy steps to creating a financial disaster recovery plan:

1. Assess your insurance.

The first place you should look to manage any risk is your insurance. The right combination of well-chosen, well-maintained policies can protect you from many of the worst disasters.

Identify your key risks and check to see whether you’re covered. Key policies to consider include homeowners, life, car, disability and long-term care. Be sure you’re indeed covered for everything you think you are. Many homeowners policies, for instance, don’t automatically cover earthquakes or floods.

2. Put away some cash for a (very) rainy day.

Try to estimate how long it would likely take you to recover financially from a disaster. Many experts recommend tucking away between three and six months’ living expenses in a savings account or money market fund.

For more extreme disasters in which you may not be able to access a bank or investment account, set aside some emergency funds. One rule of thumb is to keep on hand $50 per household member in small bills.

3. Document your financial and physical assets.

Create a detailed list of your bank accounts, investments and trusts, titles and deeds, mortgages and home equity loans, insurance policies, credit and debit cards, and tax records.

In addition, maintain an inventory of your physical assets. Doing so means not only writing down the details of your physical assets (brand/model names, serial numbers), but also photographing or videotaping them as proof of possession.

4. Back up your financial data in multiple formats and locations.

The key here is redundancy. Back up your records on CD (or using portable USB flash drives) and store both hard and electronic copies with your financial advisor and in other secure places (such as a fire- and waterproof safe at your home and a safe deposit box at your bank).

Additionally, in case of a wide-scale disaster, consider storing copies of your financial documents in a different geographic location. If you have trusted family members or close friends out of state, perhaps ask them to hang on to your records.

5. Create (or review) your will or consider a trust.

Taking disaster to its ultimate extreme, your untimely death could seriously compromise your family’s financial stability. To help mitigate a long and costly probate proceeding, be sure to create a will — or, if you already have one, review and update it regularly.

Another option is to create a living trust, which is a separate legal entity that holds your assets for your benefit during your life and provides distribution instructions after your death. Because the assets are no longer held in your name, they won’t — except in very limited circumstances — have to go through probate. (There are many other trust types that serve various purposes. Consult your financial advisor for details.)

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