The idea of being prepared requires a unique mindset. It demands that we think about and plan for a situation that is much worse than our current one. Mentally and emotionally, it’s difficult to put ourselves in the middle of the hypothetical thunderstorm when it’s sunny outside. It’s easy to fall into a false sense of security that the bad times won’t be as bad or scary as they often are. This, then, leads to not actually preparing for those times, but more so going through the motions of a plan to make ourselves feel a little better. Proper preparedness requires careful thought, planning, and a realization that when, not if, things go sideways, we have already rehearsed the steps to avoid a bad outcome.
As some of you may know from our podcast, I recently had a pretty serious health scare that landed me in UW Hospital twice for three-day admissions. Fortunately, the incredible doctors, nurses and staff have me back on the mend and feeling much better. But I can’t seem to shake the feeling of laying in that hospital bed and wondering what I could have done differently to be more prepared. My case was one with little notice and didn’t afford me any warning. That said, there were still things that I could have done to improve the outcome.
I will admit that I somewhat took my health for granted, having lived the last twenty years of my life without a medical issue of any kind. Unfortunately, this led me to my false sense of security and failure to be proactive. Why do I need a physical, I feel great? Why do I need a primary physician, I never get sick? It was this kind of thinking that led to a lack of planning and foresight as to what could happen. My situation would have been helped greatly with a few proactive steps, such as the annual baseline of health that having a yearly physical provides, and a solid relationship with a general practitioner.
And the idea of being prepared isn’t limited to our health and wellbeing. We should absolutely apply these lessons to our financial lives. Financial advisors preach about the importance of having an emergency fund and liquid assets for unforeseen expenses, and rightly so. This year has illustrated just how quickly things can go awry. Stable employment was no longer stable with the unemployment rate reaching into the double digits. The first half of 2020 was the litmus test for preparedness. We will get past the ugliness of COVID and the economy will recover, but we should think critically about how we handled this situation and what we may do differently the next time it happens.
When you consider your own preparedness, I would recommend focusing on these four areas of your financial situation. Liquid assets or an emergency fund is the first area. Ideally, we would like to see at least three months of expenses built up in bank accounts or safer investments. This will help to bridge the gap of a sudden layoff or gap in employment. A mid-term investment account is the second area of focus. This is an account that is typically using market related investments, however, the money can be withdrawn without penalty. This is the backup to your emergency fund. We generally use this money in the event that our emergency fund is depleted, but we are still not out of harm’s way. Insurance coverage is the third area. Do you have short-term and long-term disability coverages and, if so, how much do they actually cover? These are questions to ask prior to needing the coverage as the amount of the benefit may not replace your entire income. You may decide to buy additional coverage if your work benefit is lacking. The fourth area is comprehensive estate planning. In the event that you become unable to make decisions on your own, it is crucial that you have powers of attorney in place. If you do not have these documents as part of your estate plan, I would strongly recommend having your plan reviewed with an attorney.
Ultimately, we need to live our lives and not be scared about what tomorrow will bring. It doesn’t make sense to constantly live in fear. With that being said, being prepared and mentally ready is the panacea for the unexpected. It gives us the confidence that the next big thing, whatever it may be, won’t catch us off guard. They say that an ounce of prevention is worth a pound of cure, and I now have a much better understanding of that phrase. Be conscious of what might happen, think through the different scenarios and make changes to your current situation to be a little more prepared. Trust me, you will be happy that you did.