What’s Your Financial Back-Up Plan?

You follow all the financial rules: a six-month emergency fund and no credit card debt. You live within your means and have all the right insurance.

Yet sometimes, disaster strikes, and you’re wiped out monetarily anyway. A recent State Farm survey found that although 81 percent of adults believe it’s very important to have a financial Plan B, only 45 percent have such a plan in place.

“You have to have a Plan B,” says Richard Reyes, a Maitland, Florida–based financial planner. “There are some extreme things you can’t control. But you can take steps to have a backup plan and be flexible.”

José Perez knows this too well. He and his wife Olinda earned $120,000 per year, had retirement savings, health and life insurance and $30,000 in an emergency fund. “My wife was amazing with money—could make $500 and save $600,” José says. But shortly after José left his union construction job in 2008 for a position with higher pay, Olinda was diagnosed with breast cancer. Then the Bayonne, New Jersey, couple found out that José’s new employer had let their health insurance premiums lapse. “My boss didn’t tell me,” José says. “Otherwise I could have gotten COBRA.”

Instead, the couple spent their savings and cashed out retirement plans and a $100,000 life insurance policy for its $30,000 cash value. Olinda stopped working as a substitute teacher and José had to take unpaid leave to attend to her care. All told, before Olinda passed away in December 2010, the family went through $150,000 in savings to pay for medical treatment and living expenses. Today, José is contending with $40,000 credit card debt while raising two kids, now 9 and 13. “The majority of this is just bad circumstances,” José says. “Though some of this could have been avoided by me.” In hindsight, he says, it would have made more sense not to cash out that life insurance policy and instead found other ways to come up with the $30,000. “But when you’re going through a health hardship, you don’t want to break someone’s life down into financials. You just want to do the right thing.”

Assemble a team of experts

Steve Elliot, an accountant in Bellmore, New York, says situations like the Perez’s illustrate that the most important step you can take is to gather a team of experts now, so you can call on them during times of crisis. These individuals might include an accountant, lawyer, financial planner, insurance agent or health insurance advocate. “Having a team to call on in times of crisis helps relieve the panic,” Elliot says. It also helps prevent making rash financial decisions, he adds.

As a basic rule of thumb, your Plan B should include strategies for insurance, savings and investments. But it can also include things such as career planning (in the case of layoffs or business failure) and living arrangements in the event of a crisis. State Farm reports that 22 percent of those surveyed say that they would move in with family if disaster strikes. The survey did not ask whether their families would have agreed.

To get this plan solidified, State Farm spokesman Bob Lapinski urges these steps:

1. 1. Tell a spouse/partner/child/trusted friend about your plan.
2. 2. Hire a professional you feel comfortable with to help you put your plan into action. This might include a financial planner, accountant, lawyer or insurance agent.
3. 3. Get it in writing.

Even those who are adequately insured sometimes find themselves scrambling for policy information in an emergency, Reyes says. As such, make sure you are familiar with the terms of your coverage, and keep all important documents in an easy-to-find location—and tell loved ones where they can find them.

Stay informed

In cases of unemployment, it is important to avoid tapping into your cash savings for as long as possible, Reyes says. “If you have the cushion of a spouse working or a severance package, you can buy yourself a little time,” he says. “But you can’t be lazy and take a sabbatical.” Instead, find something short-term or part-time while you look for a full-time position in your field. Also, keep an open mind about your job title, industry and location. “There is nothing in the law that says that just because you’re doing XYZ, you’re going to do that for the rest of your life. Economies and industries change.”

Divorce can sometimes strike one party by surprise and turn their financial life upside down. Reyes suggests that both partners should always be familiar with all the family’s financial matters and keep their professional skills current, regardless of whether they choose to work. “You need to prepare for the worst so you’re not blindsided,” Reyes says.

This post was provided by RetailMeNot.com, originally published as What’s Your Plan B? by Emma Johnson