What to Do When You Can’t Possibly Prepare Enough

Ellen writes in with a very difficult story:

I am a huge fan of yours and have used much of your advice to simplify the money matters in my family, but my family is currently in a crisis that I have never seen discussed on your site.

In early April, my family was in a severe car accident. We were driving my mother’s van at the time and we were t-boned by a hit & run driver. My children’s car seats protected them from any damage and I walked away with only some muscle strain, but my husband was not so lucky. He had to be transported to a local hospital via ambulance due to a severe flexion neck injury.

Let me take a minute to review our household’s current standings: My husband works 40-hours a week in a fairly physical job. I work 32-hours a week. We work alternating schedules so that we do not need daycare for our two children. All of our benefits come out of his pay check because he gets a better benefit rate as a full-time employee. We had 6 months worth of savings for living expenses.

My husband has been out on FMLA ever since and will be until at least early July, when the doctor will decide whether he can return to work or needs to find a new line of work. Our FMLA expires at that point and the hospital that he works for will probably help him find another position, but we are currently unsure what that might be or if he will be able to continue working the convenient hours he is working now.

In the meantime, because we were the victims of a hit & run, the vehicle insurance is going to pay out to the uninsured motorist limits. And that’s the part that’s difficult. See, since uninsured motorist is a “final pay” settlement, we can’t get any help financially until Aaron is back to work. Normally, under the rights of subrogation, your health care will pay out, then place a lien against the settlement.

Unfortunately, though we work for a health care provider, our insurance will not pay out. At the 30-day mark of his accident, I had to pay the hospital bill, which wiped out a good bit of savings. Since this bill was to our employer, we could not afford to let it languish. The same is true of the ambulance bill. Also, his doctor bills. I have to pay enough to keep them out of collections (I’ve worked too hard on our credit to let that happen) and enough to keep the office letting him see the doctor.

We’ve been scraping by, but it’s a close thing. My husband has now exhausted his sick leave, but the lion’s share of the bills are paid. We figured that with his short term disability (which we pay for with our benefits), we would get by. Unfortunately, his short term disability claim has been denied. Since there is no subrogation clause in our short term disability policy, they won’t pay out in the case of 3rd party causation of the time off work. This was not something that even our HR Benefits people were aware of. (Obviously, this is an employer subsidized plan with an outside company, unlike our health insurance.)

Now, we are a month away from my husband returning to work, and my income is not enough. The catastrophic string of events that are unfolding just keep rolling in at us. I have applied for a credit card (we currently don’t have any, except one very small emergency card) to start putting some living expenses on and I will unashamedly run it up and pay it off when the settlement comes. The only things we have to pay now are rent, gas, food, and our vehicle insurance.

So, the obvious question is, knowing that I had stocked a huge amount of savings in the past few months and couldn’t really cut any closer to the bone, what did we do wrong? Honestly, if my husband had simply lost his job or quit, we would be in much better financial shape than we are now. What would you have done differently? We thought we did everything right.

Here’s the thing – you did do everything right. You were more financially prepared for this than the vast majority of Americans are.

This episode teaches a hard truth: there is no social safety net for when things like this happens. The only safety net we have is the one we build for ourselves.

What Should Ellen Do?

Given their situation, the best short-term thing to do is probably to rack up some debt. However, I wouldn’t be sure that a credit card would be the best choice here. If I were you, I would visit a credit union and look at more options than just carrying a balance on a credit card, which will bleed you with interest.

In some situations (people with great credit, for example), credit unions will extend personal loans which usually carry a much lower interest rate than a credit card. Also, if you have any form of collateral on the loan, you might be able to get a significantly larger loan. None of this is a guarantee, but it is an avenue worth following.

The painful truth of the matter is that you’re sitting on the lip of a whirlpool. This whirlpool often drags people into a downward spiral towards medical bankruptcy. Sometimes, if things turn out well, you can escape the pool, but you’ve reached a point where most of the events necessary for that are out of your hands. Just keep your spending low, rack up as little debt as possible, and wait.

Some Thoughts on Preparation

Ellen’s story is a painful one, but stories like this happen constantly all over the world. People are happily living their normal lives, then they get into an auto accident or find out that they have a serious disease – and their happy normal life is derailed.

We don’t like to think about these things.

It’s much more pleasant to think about a future that is brighter than our current life. In fact, it’s that bright future that often motivates us to work hard – it’s our psychological carrot. We work hard for that great new home. We work hard to make sure our kids can go to a wonderful college. We work hard for that great vacation in a few years.

The truth is that these things happen to everyone – and we rarely know in advance that they’re going to happen. The less prepared we are, the closer we are to the “whirlpool” that I mentioned above, and that downward spiral often leads to bankruptcy and effectively starting over.

What can you do to prepare yourself?

An emergency fund

Cash is king. Yes, there are lots of guidelines for how big your emergency fund should be (I use the rule of thumb of two months of family living expenses for each dependent), but giant emergencies like these often eat through that like it’s nothing. As a family, we’ve moved to an “endless” emergency fund. I just contribute to it automatically each month and don’t even look at the balance. I know that there’s plenty there for a crisis of any kind.

Financial preparedness documents

Know every account that you have and have the account information in a place where it can easily be found. Yes, I wrote about financial preparedness documents before, but having one ready is truly vital. Create one, put it in a safe place, and update it regularly.

Long term care and long term disability insurance

What happens if you can no longer work at your current career? What if you need managed care for a long period of time? That’s what these types of insurance are for. Yes, not everyone can afford them, but if you can easily afford them, it’s a good place to put your money. It protects your family not from your death, but from your long-term incapacitance.

Assets that retain their value

A flat panel television doesn’t retain its value. A PSA-certified Babe Ruth baseball card does. A video game console doesn’t retain its value. Gold bullion does. When you’re looking to buy something for personal enjoyment, ask yourself whether it retains value and put some premium on the things that do.

Transferable skills

What happens if you’re no longer physically able to conduct your current career? You’ll have to move on to another one. Do you have any skills that might help you find another one – especially skills that help you with the career you have now? If you don’t, you might want to start working on them. Public speaking, information management skills, time management skills, communication skills – these are all vital in almost every field.

Remember, the more prepared you are for an accident, the better off you’ll be if/when it happens.

Even better, seek out ways to prepare for that situation while improving your current one.