The Earthquake’s Hidden Financial Lessons

Think you're safe? Think again.

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This week, when the East Coast experienced a 5.8 magnitude earthquake, one of the most interesting after-effects was the behavior of people who were inside buildings. Virtually every building in the District was evacuated, and folks just stood on the sidewalks next to twelve-story buildings.

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It’s natural to want to leave a building during an earthquake. After all, who wants to be in a building that crumbles to the ground? This fear, however, drove people into the streets and sidewalks, and ironically enough, into perhaps the most dangerous place of all. As FEMA explains:

The greatest danger exists directly outside buildings, at exits and alongside exterior walls. Many of the 120 fatalities from the 1933 Long Beach earthquake occurred when people ran outside of buildings only to be killed by falling debris from collapsing walls. Ground movement during an earthquake is seldom the direct cause of death or injury. Most earthquake-related casualties result from collapsing walls, flying glass, and falling objects.

The false sense of security people felt standing outside of buildings applies to our finances as well.

Let’s take the stock market, for example. During a market correction as we’ve experienced recently, out of fear many investors flee the market for the “safety” of Treasury bonds. U.S. bonds feel safe because, unlike the market, you won’t lose money if you hold the bonds to maturity. The bonds pay interest that you can take to the bank.

Selling stocks in a falling market in favor of Treasurys, however, is a lot like leaving a building during an earthquake. You may feel safer, but you’ve likely put your finances in grave danger by liquidating stock positions at a time when equities are relatively cheap, and purchasing Treasurys that are relatively expensive. When it comes to buying just about anything other than stocks, we look for bargains. But when stocks go on sale, we head for the exit.

There are ways to counteract the fear that drives many of us to make poor financial decisions. Just like dealing with an earthquake, it all begins with preparation. So here are five things you can do now to prepare for the next seismic event in your finances.

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1. The first and most important step is to save for a rainy day. While you can never prepare for every possible financial crisis, having enough money in the bank to get you through a short-term loss of employment, medical emergency, or home repair is the first step toward taking control of your finances. Building an emergency fund is not difficult, and it will help you sleep better at night, too.

2. Insure what you can’t afford to lose. Insurance is the kind of expense we all love to hate. It’s a necessary reality to protect against big losses. So it’s important to make sure you have the right type of insurance with sufficient coverage. After the quake this week, many are asking whether they should insure their home against earthquakes. I’ve had earthquake insurance for years, even though I live in Virginia. While the chance of a quake that damages my home is minimal, the potential loss could be catastrophic. And that’s exactly what insurance is designed to cover.

3. Invest for the long term. One reason many people fear the stock market is because they have not properly diversified their investments. The stock market should be for long term investing of ten years or more. If you have money in the market you’ll need in a few years, you will be much more likely to cash out in a falling market. If you know you want need the money for ten years or longer, it’s much easier to weather the market turmoil.

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4. Prepare for unemployment. Having a job with a regular paycheck is comforting. But as many have learned during our “jobless recovery,” steady employment should never be taken for granted. If your company let you go today, what would you do? If you don’t have a plan to deal with an unexpected downsizing, now is the time to create one.

5. Keep first things first. As with anything in life, it’s important to know what’s important. While our finances do deserve are attention, should they ever be our most important priority? Keeping life in perspective can often help us navigate through difficult times. It may also help us avoid panic when the next financial earthquake hits.

DR is the founder of the popular personal finance blog, the Dough Roller, and author of 99 Painless Ways to Save Money.