Sep 26

Sep 26 Five Financial Lessons Learned from Tropical Storm Imelda

Tropical Storm Imelda hit the Texas coast last week, bringing with it, a path of destruction to Houston and surrounding areas. Residents were forced to deal with water-logged homes, flooded cars, blocked roads and flash flood conditions when the storm dumped as much as 43 inches of water in some areas, to become one of the wettest tropical storms in U.S. History, according to a New York Times article.

The storm has caused at least 5 known deaths at the time of this writing—4 people who drowned in high flood waters and one other, whose body was found in a truck, which had stalled in high water, according to USA Today.

Now that the waters have begun to recede, residents are beginning to discover just how much devastation the storm has caused.

Our Experience with Tropical Storm Imelda

We were fortunate in that we did not take water into our home nor did we suffer any deaths or physical injuries as a result of this storm.

The night before the storm hit, I had just come home to Houston from a 3-day business trip in Dallas. My plane didn’t get in until midnight, and I was so tired from depositions that lasted 12 hours the day before, I decided to work from home the day Imelda hit.

My sister and I went to lunch while there was a light drizzle outside, but we had no idea that a flash flood was about to ensue. After lunch, we attempted to drive home through pouring rain, and waters were quickly rising. We drove through high water on our way home in my car, before reaching a high spot of dry land, quickly abandoning the car, and walking home through waist-high water.

When we got there, we saw this.

That’s my sister’s car, parked in front of my house.

And all that water fell in about an hour’s time.

The water had seeped into the car and was covering the floor of her car by several inches.

As I write this, we are waiting to see if the car is a total loss or if it can be salvaged. And the fact that the car still has a loan on it brings a special set of nightmares. As a result, this whole process has reminded me of several lessons I want to pass on to you, to save you the hassle if you ever find yourself in a similar situation.

Lessons Learned from Tropical Storm Imelda

1. Make sure you have comprehensive coverage on your vehicle.

There are a number of coverages available for your vehicle, but for the purposes of this article, I’m only addressing coverages implicated by the storm.

Liability Coverage. The law requires you to carry liability insurance. This covers damage that you cause to other people or to other people’s property. For instance in Texas, the state minimums are $30,000 for Bodily Injury Liability per individual and $60,000 per accident as well as the $25,000 for Property Damage Liability. If you cause property damage or injury in a collision to someone else, this coverage kicks in to pay for the damage.
Comprehensive Coverage. This type of coverage helps pay to replace or repair your vehicle if it's stolen or damaged in an incident that's not a collision. Comprehensive coverage typically covers damage from fire, vandalism, falling objects (like a tree or hail) and flooding.

In the case of this storm, if the car only had liability coverage, there would be no coverage for this natural disaster, nor would the insurance company provide a rental car.

So it’s important to carry not only the insurance required by law (liability), but comprehensive and rental car coverage as well.

If a vehicle is financed, the finance company typically requires you to carry comprehensive coverage to protect their interest in the vehicle. Once the car is paid off, only liability is required under the law.

A lot of people who are struggling financially may choose to stop carrying comprehensive coverage, in an effort to reduce their monthly expenses. I would never advise this. Not having comprehensive coverage can lead to disastrous consequences in the event of unexpected damage to the vehicle.

Luckily for us in this situation, the car had comprehensive coverage.

2. Avoid car payments like the plague.

So, my sister’s car is actually my Mom’s car, which my Mom lets my sister drive and use. Mom and Sis owe about $4,000 on that car.

In the event the car is totaled, the insurance company will pay the value of the car.

If the value of the car is less than what is owed on the car, Mom and Sister will be stuck paying a car payment on a car that basically doesn’t exist and that they can’t even drive. Can you imagine any greater financial nightmare than being forced to make payments on a car that doesn’t exist?! How about, in addition to that, having to somehow find a way to replace that vehicle? Total. Freaking. Nightmare.

If you don’t have a car payment in a situation like this, you’d get to pocket the full amount of the car’s value you’d receive from the insurance company. You could use that money to replace the car without any stress.

My husband and I are very fortunate to be able to pay cash for our last 2 cars. We did this even while on our debt free journey. I was adamant that we would not have car payments. And we haven’t had them for so long, I couldn’t bear the thought of ever having one again.

I know a lot of people say they can’t afford to pay cash for cars, but I promise you—you really can. Start off small with a crappy $1,000 car and move up in car over time.

But I realize a lot of you who are reading this have cars that are financed (like Mom and Sis). If you do have a car that is financed, you need GAP insurance.

3. If you’re going to finance a vehicle (which you shouldn’t), you need GAP Insurance.

Look, I’m never going to advise you to get a car loan. But if you just can’t help it and/or have one already, you need GAP insurance. GAP insurance stands for Guaranteed Asset Protection insurance, and it covers the difference between what is owed on the car and the cash value of the car, in the event the car is totaled.

We all know that cars lose their value FAST—from the second you drive them off the lot. In fact, most cars lose 20% of their value in the first year.

So, in our example above, let’s say the insurance company totaled the car and gave Mom and Sis a check for $1,000. They would still need to pay $3,000 on that car to pay off the $4,000 they owe. If they had GAP insurance, it would cover the remaining $3,000. Talk about an awesome solution to a potential nightmare situation! (But, Mom and Sis don’t have GAP insurance—bummer).

You should definitely consider GAP insurance if any of the following are true for you:

You purchase a car with little to no down payment
You finance a car for an extended length of time (60 months or more)
You rolled over negative equity into your current car loan
You think you will ever owe more than the car is worth
You bought a car that depreciates rapidly

You can get GAP insurance from your car dealer or your insurance carrier.

4. Make sure you can actually afford your deductible.

A car insurance deductible is money you have to pay toward repairs before your insurance company will cover the rest.

For example, if there are $1,300 worth of repairs to your vehicle, and your deductible is $1,000, you have to pay $1,000 before the insurance company will pay the remaining $300. If your deductible is $500, you only have to pony up the $500, and the insurance company will kick in the other $800.

Increasing the amount of deductible is a way to save money. This is because the higher the deductible, the lower the amount of your premium. A lot of people who are struggling to make ends meet often choose a higher deductible to lower their monthly insurance payment. This is exactly what Mom did. However—here’s the important part—selecting a high deductible can land you in a world of trouble if you can’t afford it when you actually need to pay it.

When you are deciding on a deductible, you need to make sure you can actually pay that deductible whenever the time comes. If you have a $1,000 deductible and don’t have $1,000, you can’t afford to get your car fixed. You’ll be forced to sell items around the house or pick up a part-time job to be able to cover the cost when the time comes (because I would never advise you to go get a loan to cover it or put it on a credit card. We’re anti-debt around here, remember?)

So, make sure you set aside money in your emergency fund sufficient to cover whatever deductible you have. If you have $1,000 deductible, you better have $1,000 tucked away somewhere specifically for this purpose that you can access in a heartbeat if need be.

5. Have an Emergency Fund.

It is so critical to have an emergency fund in place as step one to any financial plan—yes, even before you begin paying off debt.

Without an emergency fund in place, most people will be forced to turn to credit cards and loans to cover any emergencies. And our whole goal around here is to be done with debt forever—not keep adding to it.

A random freak flooding event like this one—or any unexpected natural disaster—is a perfect example of why you need an emergency fund. An emergency fund is designed to cover unexpected expenses precisely like this.

Mom and Sister don’t have a $1,000 deductible set aside, nor do either one of them have an emergency fund. They are going to be in quite a pickle when the time comes to pay that deductible. (And even more in a quandry if they have to completely replace the vehicle).

But, if they had at least $1,000 set aside for emergencies, this whole incident would be only a minor inconvenience instead of a major catastrophe.

For this reason, having an emergency fund is STEP ONE. Do this BEFORE you begin paying off debt.

Final Thoughts & Action Steps

This whole car incident has really been a fantastic financial cautionary tale. I don’t know about you, but I always prefer to learn from someone else’s mistakes than to make my own. I hope you’ve learned some things here when it comes to taking care of your vehicles.

If you haven’t yet, contact your insurance company and evaluate your coverage. Do you have comprehensive coverage? Do you know how much your deductible is? Can you afford to pay it in case of some freak emergency? Take steps NOW to protect yourself from disaster BEFORE an emergency strikes.

What about you? Have you ever had a car catastrophe nightmare? Tell me about it in the comments below.