How climate change can affect your finances
Kristy Jiayi Xu got an unwelcome surprise this New Year’s Eve: The roof of her garage was leaking during a severe rainstorm in San Francisco. Delays in getting a contractor to fix the roof has brought unexpected costs to keep things dry, including a dehumidifier.
“My husband and I are both from the East Coast, so we always think the rain here lasts for a day,” says Xu, certified financial planner and CEO of the firm Global Wealth Harbor.
In September 2022, she and her husband faced a heat wave — another weather incident they weren’t expecting.
“We have air conditioning, but the bill was so high,” she says.
For over a decade , scientific reports have shown how climate change will likely make extreme weather events more frequent. And this trend might affect your wallet.
Let’s break it down.
HIGHER INSURANCE DEDUCTIBLES AND ADDITIONAL POLICIES
More storms typically mean more risk of damage to your home or car. And getting enough home and other insurance — at a reasonable cost — can be its own challenge.
Competition among insurers is shrinking in areas most vulnerable to climate change, which means higher prices for consumers, especially higher deductibles, says Amy Bach , executive director of United Policyholders, a nonprofit that advocates for insurance consumers. A deductible is the amount you pay before an insurer covers damages.
In hurricane-prone states, some insurers offer home insurance policies with separate hurricane deductibles . And insurers’ policy language keeps changing to limit what they pay for, Bach says.
Climate change contributes to rising insurance costs, but pricing risks is what insurers are equipped to do, said Jeff Brewer , department vice president of public affairs for the American Property Casualty Insurance Association, in an email. However, legal system abuse, claims fraud and regulatory interference contribute to growing market instability in several states, he said.
If you live in an area prone to flood s or earthquake s, you’d want extra insurance since most homeowners and renters insurance policies don’t cover damages caused by those disasters.
“The toughest thing is, so many households now are on a tight budget. It’s hard to tell people to buy three separate insurance policies,” Bach says.
HIGHER FOOD AND ENERGY COSTS
Extreme temperatures have become more frequent, which can affect crop production and household energy usage. In turn, your grocery and energy bills may increase.
“Higher temperatures over recent decades have played an increasingly non-negligible role in driving price developments,” according to a 2021 report by the European Central Bank that analyzed temperature data and price indicators in 48 countries, including the U.S. “Food price inflation could be explained by a negative effect of hot summers on food production, resulting in supply shortages.”
Home heating prices this winter are expected to reach the highest level in 10 years, according to the National Energy Assistance Directors Association. And last summer, NEADA found that cooling costs also increased.
INDIRECT HITS ON INVESTMENTS
“Climate change is going to impact the long-term valuations of both stocks and bonds,” Zach Stein , co-founder of Carbon Collective — an investment advisory firm focused on creating portfolios that fight climate change — said in an email.
Some industries’ performance may hurt your investment portfolio returns. Stein predicts that we’ll see the most volatility in upcoming decades in agriculture, insurance and real estate.
Rising sea levels will likely affect coastal real estate. For example, Florida homes exposed to flooding could lose 15% to 35% of their value by 2050, according to a 2020 report by the global consulting firm McKinsey.
WHAT YOU CAN DO NOW COMPARE HOME INSURANCE OPTIONS.
Get quotes from multiple insurers. In areas where insurance is hard to get, Bach recommends getting help from an independent agent or broker. She suggests the website TrustedChoice.com as one option.
EXPAND YOUR EMERGENCY FUND.
Experts generally recommend setting aside three to six months’ worth of living expenses in a savings account. Since disasters can have more unpredictable costs than job loss, CFP Xu recommends aiming closer to the six months’ figure.
CONSIDER BANKING AND INVESTING THAT SUPPORT ENVIRONMENTAL CAUSES.
A handful of banks and credit unions have third-party certifications to prove that their customers’ deposits don’t support the fossil fuel industry. For investing, look into mutual funds or robo-advisers that use environmental, social and governance factors.
“STORM-PROOF” YOUR PROPERTY.
Try reducing potential damage before the next big weather event. In case of flooding, have sandbags available and clear your gutters. In case of a wildfire, look into fire-resistant vents and roof materials. In case of a hurricane, cover windows with plywood or metal storm shutters.