WATCH ABOVE: 5 pieces of advice for getting through a financial emergency.
TORONTO — Canada’s economy hit reverse for the second straight quarter of 2015 – knocking the country backwards into its first technical recession in six years, according to Statistics Canada. We spoke with an expert who gave us some tips on how you can weather this, and any, financial storm.
“People need to make some changes,” said Scott Hannah, president and CEO of the Credit Counselling Society.
One of the things he sees is that most people don’t have a sufficient emergency fund to deal with unexpected life events, like a recession or job loss.
A BMO survey released Tuesday supported that observation. It found that more than half (56 per cent) of Canadians have less than $10,000 in available emergency funds. Forty-four per cent have under $5,000 saved, and nearly a quarter (24 per cent) are living paycheque to paycheque.
Hannah recommends ideally having six months worth of income on hand. If you’re not quite there, don’t let that number overwhelm you.
“When you’re dealing with a tough situation, typically what happens is the amount of money you require is scaled back. You’re going to scale back on discretionary expenses and look after only those core expenses that you need.”
So where do you start?
1. Identify all your monthly expenses
“It’s every $5 here, $10 there,” said Hannah. “If you take that approach with every single expense line. You’ll find some real savings.”
Here are some suggestions for areas that you can make (even temporary) changes to:
- Look at your cellphone expenses. Maybe you could scale back on your plan (do you really need voicemail? Isn’t that what caller ID is now for? Or a text message?). For families, bundling services might be the way to go.
- How high is that heating bill? Perhaps it’s time to lower the thermostat and throw on a sweater, or curl up under a blanket.
- If you spend a lot on eating out, consider making your meals at home. Sure, it may take more time but it’ll save you a lot of money in the long run.
- If your family has two vehicles, think about reducing to one and making use of public transit. If you’re not quite ready to sell your car but want to save some cash, you can always put it on parking insurance which is a fraction of the price.
- Have a child in a number of extra-curricular activities? Sit down and discuss which of them they like the least.
“Involve your family, and don’t just say, ‘We’re cutting back expenses, this is what’s going.’ You’ll have an uprising on your hands,” said Hannah.
“The goal here is to reduce expenses with minimal impact on lifestyle. If you cut back too extreme, it’ll be difficult to sustain for the future.”
2. Establish a budget
A budget is “a living thing that changes over time,” Hannah explained. For someone who’s never used a budget before, he added, it can take three to six months to get used to.
One of the mistakes the Credit Counselling Society sees people make, is that when they get paid, they pay all their expenses first and then wonder why there’s nothing left to save.
READ MORE: The biggest money mistakes Canadians make
“We encourage them to do the reverse. Ensure that you take out funds from your paycheque to achieve your financial goals first, and live on the rest. That way you’re sure your financial objectives are going to be met. And if one of them is to build up an emergency savings plan — that’s critical — then that should be at the top of the list.”
For people who have no emergency savings fund and also have debt, Hannah said it’s still important to set money aside while paying down the bills.
“They may not be able to pay down their debt as fast, but in a crisis…it’s more important that they have cash on hand to deal with that, as opposed to lowering their debt and having nothing on hand when an emergency or recession hits.”
3. Utilize a paycheck planner
Before you get paid, you should have a good idea of how you’re going to spend the money.
If you have a big expense like an insurance payment coming up, ideally, you should be setting aside a certain amount per paycheque so that you have the funds on hand when the money’s due.
“It’s one of the areas that frustrates a lot of people because they don’t set those funds aside. And then when it comes time to pay, they don’t have the cash to deal with it and, therefore, dip back to using credit again to find that they’re really not making progress.”
WATCH: Here’s a look at three online tools that can help get your finances in order and balance your budget.
One thing you don’t ever want to do is cash out your retirement savings, Hannah warned. “Because you can never get that back again.”
And if you do lose your job, “everything is up for discussion,” he said. “Could they rent out the garage? Could they take on a boarder? Take on a paper route…You can’t be too proud.”
For more free financial advice go to nomoredebts.org, or make an appointment with an advisor at your bank.