CERTAINLY, we all know how to get ready for natural calamities, like strong typhoons, flooding, earthquake, and the resulting consequences of no electricity, no water, no cellular service and sometimes no food. We all try to get ready for such a calamity by having a flashlight or candle handy, some canned goods and storing whatever water we can.
However, have you considered financial-disaster preparedness? Financial disaster can occur on a personal basis or in a much wider scope, covering your city or even on a national level. Financial disaster can happen at a personal level, when you have to face a financial crisis, such a losing a job, someone in the family getting into an accident or hospitalized, a terminal illness, a death in the family, having your house burn down or having something valuable stolen from you, and any unexpected event that has a significant cost.
Preparing for such a personal financial disaster is a long-drawn-out process, much like putting up a sinking fund for self-insurance. You start by forcing yourself to set aside cash every time you have a cash flow, such as from your salary, dividend or commission. Hopefully, once you have enough cash, you can invest in something that actually has a return, such as a time deposit or money-market placement, that gives you interest income. Other alternatives, depending on your level of competence and the timing, is the stock market and even real estate. If you manage your investments well, you have the opportunity of letting your money work for you, otherwise you could end up eroding your capital. Buying a car or expensive clothes for your personal use is not an investment, why? They do not provide you a return, and only lose value over time.
On a wider scale, financial disaster can happen to whole cities, like in the case of Tacloban or Zamboanga, and even an entire nation, similar to what is happening to Greece now. Financial disaster occurs when there is a breakdown in financial services, no law and order, a failure of government or the breakout of war. Typically, you will have no access to your money in the bank, because the banks are closed and there is not money in the automated teller machine. Chaos could also prevent you from getting access to money or actually being able to spend it because stores are closed. The local currency could lose much of its value due to hyperinflation or devaluation. Your property and assets could be taken over by lawless elements, the government or even the invading forces.
How does one prepare for that? Obviously, the more affluent you are, the better your chances are at financial-
disaster preparedness. Keeping money and valuables in the home is a must.
Unexpected events could happen that will require you to just pack up and go with whatever you can carry. Aside from keeping pesos, other currencies, such as dollars or euros, might also be a good idea. Having some gold coins and real jewelry would be nice to have in your grab bag. Keeping some funds abroad in a more stable country or a financial center has its merits. You could be leaving the country with just the shirt on your back but it would be good to have access to funds when you reach your destination.
What are the primary considerations in financial-disaster preparedness? Accessibility, liquidity, capital appreciation and practicality are of paramount importance. Accessibility means your ability to be able to get hold of your money or assets. It would be nice to have a ton of cash in your safety deposit box but it won’t do you any good if the bank is closed. Liquidity means your ability to convert whatever assets you have into something that you can spend or make use of. You may have a huge mansion in the most upscale neighborhood but when there is trouble, will you be able to sell your property immediately at a price that you think is fair? Much like buying stocks or bonds, during a financial crisis, you would be hard-pressed to sell these assets and even if you were able to, you would probably have to sell at a big loss.
Capital appreciation should also be a major consideration.
How well will the asset value appreciate over time, and will it provide you some regular cash flow? What happens to the value of the asset when financial disaster strikes? You certainly want to have an earning asset that will appreciate over time, and retain its value even during bad times. Having some practical assets could also be useful during hard times. If the economic order breaks down, there could be a scarcity of goods, such as food. However, if you had a farm that produces rice, vegetables, fruits and other crops and have access and can maintain control over it, then that would certainly be a big advantage.
Financial-disaster preparedness does not happen overnight, it is an ongoing process that does not go to waste. If nothing bad happens, you can use all of that for your retirement!
(Comments may be sent to georgechuaph@yahoo.com)