by Ted Halpern
A disaster recovery plan is crucial for both businesses and individuals. Emphasis on recovery. We need a plan to weather financial storms, of course…but what about the day after the storm?
The structure of your plan depends on how you receive your personal income, or your revenue as a business. For example, a coffee shop that receives daily income needs a lower level of cash reserves on hand. However, that shop would be in trouble if it was without daily inflows for even a short period of time. Making sure there are suitable reserves on had due to income interruptions is a core focus of any Disaster Recovery Plan. Reserves for a family or a business whose income flow is weighted in a more quarterly manner, will require reserves to cover roughly three to four months, depending on when a downturn occurs! Likewise, if you are salaried and your job is secure, you may not need more than 3 months of cash reserves. But if your income largely consists of bonuses, or a large distribution one or two times per year, then you would need a larger cash reserve balance.
Going through a historic crisis like this pandemic provided an extreme real-life test to see if your personal cash flow plan is able to meet your family’s needs. Think of it as your own stress test, similar to what banks are required to go through.
As part of your plan, make sure your financial picture includes ample liquidity to weather a financial crisis. If your money is tied up in illiquid assets like property or debt, you cannot be as nimble in accessing cash when you need it most.
These steps will help you to weather an interruption in income. But still, it is not enough to have ample reserves. You also need a plan for the next sunny day.
We suggest you take the following steps to build your own Disaster Recovery plan:
- Get a handle on what your cash flow looks like. How much money is needed on a monthly basis?
- Consider how you receive income. If it is very consistent, then about 3 months of reserves is likely fine. If your income is based on some sort of bonus or distribution, then think about how long of a period you can be exposed to before you receive this benefit? You may need to carry enough to float you a 4 to 6 months or more.
- Be sure you have the appropriate disability income insurance – short and long term.
- If you have any debts, take advantage of this historic period of low interest rates and reset. A home refinance can make sense as well as a disciplined move on any revolving debt you might carry.
- Ensure you have access to some debt financing. This can be a credit card with a healthy line of credit or a home equity line established should you need to make use of it.
- Is there any large expense upcoming? If you have something planned within the next 12 months, then add this to your reserve balance. This will permit you to stay as close to on track with your life as possible.
- Be sure you exercise patience with your investments. This can be real estate holdings or securities. Recognize that nothing is permanent! A recovery will happen. Be sure you are on the right path to experience the full impact of the recovery when it happens, rather than fleeing to cash.
- Be organized and have a productive outlet for stress. Having your life in order helps to get through difficult time periods, and having something productive to occupy your time provides a healthy way to deal with what life can throw at you.
While reserves are critical, be sure to not hold over the amount you need, particularly in this low interest rate climate.
Keep in mind how quick the market adjusted downward in February and March at the onset of this pandemic. Then, consider how quickly it snapped back – well before the end of this pandemic was in sight. Markets make sharp turns. Be sure your investment portfolio is prepared for this by having a custom portfolio to meet your unique objectives and goals. Also, make sure your portfolio regularly is stress-tested to make sure it can survive such volatility and stay on track.
Markets always go up; we just don’t know the timeline. Rather than fearing volatility, have a realistically optimistic view of the future. Storms pass and it pays (literally) to be ready for the recovery.
In addition to the personal human level, this is happening on a national corporate level. So far in 2020, several national big-name companies have filed for chapter 11 bankruptcy:
Now, this doesn’t mean these companies will disappear—but they may be restructured or bought out by competitors. Some of these companies were struggling before the pandemic and this interruption was enough to push them over the edge. In some industries, it is normal to have more debt and less cash on hand than in others. In either case, they did not have the appropriate cash reserves to carry them through this painful period. The difference between sinking or swimming in the pandemic was whether the business had a recovery plan suited to its individual needs.
The common thread with all of these steps is to be prepared for both the setback and the comeback. Don’t find yourself in a position like the companies that have filed for bankruptcy this year—either due to insufficient preparation or already being in precarious financial straits. Be prepared for the down times and the better times that are sure to come.