Daily life has changed. We don’t know exactly for how long, but it won’t be forever. We will make it through and be stronger as a result. This is not to minimize effects of COVID 19; it makes sense if you’re feeling nervous, anxious, or even fearful – natural emotions in these trying times. These emotions, however, are the enemy of rational decision making and can lead to knee jerk reactions. Remember the last time you made a sound financial decision by acting on impulse? Me neither. Let’s take a collective deep breath, organize our thoughts, and make the right trade-offs so that the we don’t exacerbate the problem and jeopardize our long-term goals.
A reduction of income is an immediate issue for many Canadians and can risk one’s ability to service debt obligations or pay basic expenses. Before selling the farm or tapping into your nest egg, revisit your budget through a new lens.
Understand your income
Maybe you’re an employee who has temporarily lost their job or an entrepreneur with a dramatic reduction in revenue. The picture may be less bleak with the government’s COVID emergency initiatives. Learn about the programs applicable to your situation – EI, CERB, CEWS – and apply immediately. The Canada Child Benefit has also been increased. The first step towards budgeting is to have a firm grasp on the amount of funds coming in the door, the new baseline family income.
Understand your basic expenses
Categorize your expenses to determine what is needed for basic necessities: costs concerning food, shelter, utilities, communications, insurance, and debt servicing. Don’t forget to factor in non-monthly expenses related to these basic necessities such as property taxes. If these costs are greater than the new baseline income, don’t panic. The major Canadian banks are offering mortgage deferrals programs. The city of Ottawa has a property tax deferral program. All payments have been suspended for outstanding student loans with the NSLSC. Some insurance policies will have an accumulated cash balance that can be used to cover premiums. Being able to satisfy your basic needs is clearly the top priority, so leverage these options if needed.
Prioritize discretionary spending
If you’re being forced to operate on a lower income, a proportionate reduction in discretionary spending is the best way to weather the storm. To achieve this, catalogue all cash outflows that are not part of the basic expenses above and assign each a priority ranking. This is a personal exercise but generally, outflows such as planned savings strategies should not be sacrificed to fund the purchase of new electronics or furniture. Make these purchases when cash inflows improve. Conversely, maybe cutting back on the monthly TFSA contribution is worth a streaming service subscription to keep yourself and the family entertained during lockdown. Good habits, such as the savings strategy of paying yourself – saving first rather then banking what’s left over – should continue if possible. One result of social distancing is you may have reduced your discretionary spending without a concerted effort. Trips to the movies, restaurants, or even trips themselves have dried up, so if these activities were ranked highly on your priority list (making them more difficult to curb), the new forced frugality will help reduce spending.
It’s not ideal to have to withdraw from savings or take on debt to support cash flow, but in hardship sometimes our hand is forced. Funds domiciled in non-registered savings accounts should be your first withdrawals, followed by TFSAs, and RRSPs as a last resort. If you hold non-redeemable GICs in a non-registered account, it could be advantageous to cash the GIC and accept the penalty (foregoing accumulated interest) before withdrawing from RRSPs. Remember, withdrawing from an RRSP is not like a TFSA: there’s a withholding tax on the withdrawal, your taxable income for the year will increase, and the contribution room you used to make the deposit in the first place will not reset.
If you’re forced to borrow funds to meet your financial obligations, do so in the most cost-efficient way possible. A home equity line of credit is generally the best option, followed by unsecured credit lines. Avoid carrying balances on high interest credit cards and use you the previous options to clear any balance that cannot be fully paid off. Remember that debt servicing should be considered a basic necessity and take precedence over any discretionary spending – better to live a few months without Amazon prime than spend a few years rebuilding your credit.
Adjusting in these extraordinary circumstances can be extremely difficult. This is not the end of society, nor capitalism. We shall endure and thrive again once more. Your trusted advisors at Welch are here to help support and guide your decision-making. We’re all in this together.