The fast-spreading new coronavirus has health authorities recommending that Canadians prepare a COVID-19 emergency kit. But they may also want to have an emergency fund.
With stock markets and oil prices plummeting to record lows, some economists are expecting a recession. RBC, for example, recently updated its economic forecast to predict Canada will experience a brief economic downturn before bouncing back somewhat in the latter months of the year.
While the bank is still optimistic that the economic pain will be generally short-lived, RBC warned of job losses in industries that have been particularly exposed to the virus-led disruption:
“Falling oil prices will hit the energy sector harder.”
So what can Canadians do to soften the potential blow to their bottom line?
Perform a financial reality check
The first step is assessing your financial vulnerability. Income, says financial planner and best-selling author Shannon Lee Simmons, is “the most important piece.”
“Are you likely to be laid off in a recession? If so, do you qualify for Employment Insurance?”
If you do, you’ll want to calculate how much money you’re eligible to receive through EI. If you’re a freelancer or business owner, try to estimate how much lower your income could go as work slows, says Lee-Simmons, founder of the New School of Finance.
Next, calculate how much money you’d need to get by until you found a new job or business went back to normal, she adds.
There are likely many ways in which you’d be able to cut back expenses in a lean time, said Robb Engen, a financial planner and author of the popular money blog Boomer and Echo.
For example, if your monthly revenue takes a dive, you may want to put contributions to your retirement account on hold, he says.
Go through your current budget and see which line items you could drop if you had to, Engen suggests. You’ll find you can probably do away with some of your current subscription services.
This is also a good time to review your monthly bills and see if you can lower any of them, he adds. For example, could you get a better deal on your cell phone plan or your home and auto insurance?
“Even if you could save yourself $20 a month on one of those recurring expenses, that’s $240 in the year.”
A few of those savings could buy you some flexibility during a spell of unemployment, said Engen.
They could also help you beef up or establish an emergency fund, he added.
Build an emergency fund
Engen recommends having at least three months’ worth of living expenses stashed away in a bank account. Having access to a home-equity line of credit (HELOC), is simply not enough, he adds.
While HELOCs, which have relatively low-interest rates and flexible repayment terms, can be a source of funds in a crunch, they shouldn’t be your first and only resource in tough times, Engen said.
Ideally, your emergency fund would allow you to ride out the rough patch without racking up any more debt, he said.
Paying down your high-interest debt is even more important than having rainy-day savings, according to Engen. Paying 20 per cent interest on your credit card carryover balance is what Engen calls a “hair on fire emergency.”
“You should get rid of that as soon as possible.”
Then if your income dips in a recession, at least you’ll have some room to borrow again, if you absolutely need it, he said.
But ramping up your debt payments isn’t always a good idea. Canadians with student loans are better off focusing on beefing up their emergency fund, Lee-Simmons says.
Government student loans are relatively cheap, she notes, and borrowers who can’t keep up can apply for repayment assistance.
If you lose your job, you can put your loan payments on hold and use your emergency fund to help carry you through without piling on more expensive credit card debt, she argues.
Buying a house
The flip side of the coronavirus upheaval is very low-interest rates. Financial market turmoil has pushed down the cost of borrowing, including for mortgages. Both five-year fixed rates and variable rates are currently hovering around an eye-watering 2.6 per cent, according to rates-comparisons site RateSpy.com.
If you’re in the market for a new home, this means you can now get a larger mortgage and buy a bigger house. But it also means you could easily become overstretched financially, Lee-Simmons says.
“Make sure that you buy a home you can afford and ensure that you can … put money into emergency savings once you’re in the house so that if there is a recession and you lose your job, you can make ends meet.”
Having a baby
A new mouth to feed will undoubtedly add to your budget, but Lee-Simmons says that’s no reason to let the economy dictate when to start or grow your family.
“There is no magic amount of money or income level that you need in order to be able to afford a kid,” she says.
“People make it work with a lot and people make it work with a little.”
For those approaching retirement
The gyrations of financial markets in the past few weeks have been bad enough to make anyone with money in the stock market feel sick.
For investors with a broadly diversified portfolio and a long time horizon, the advice is often to do nothing at all. With no need to withdraw funds, they can afford to wait out the market crash.
For those approaching retirement, though, it’s a different story. If you’re going to need to draw on your investments in the not-so-distant future, you need a plan to protect your portfolio from market declines, Engen says.
He recommends having enough to cover at least five years’ worth of expenses in a mix of bank deposits and cash-like investments.
Engen suggests putting one or two years’ worth of expenses in a savings account. In addition, investors can cover another three to five years with a so-called “ladder” of Guaranteed Investment Certificates (GICs).
GICs work like a special kind of deposit. Usually, investors lend the bank their savings for a set number of months of years and receive interest in return. With GICs you are guaranteed to get your principal back, which makes them one of the safest investment options out there.
If you need $20,000 to live on in addition to government retirement benefits and any pension you may be getting, here’s how a GIC ladder would work. You’d put $20,000 in a one-year GIC that would return principal and interest after a 12-month period. You’d put another $20,000 in a two-, three-, four- and five-year term GIC as well. Each year, the maturing GIC will provide for your cash-spending need.
The rest of your portfolio could be in a mix of stocks and bonds. Every year, you can draw from the bonds to buy a new five-year GIC. You can draw from your equity holdings to replenish your bond investments when the stock market is having a better year, Engen says.
“The nice thing about this kind of bucket approach is that you can ride out a period of volatility because you have … years’ worth of spending in more secure, guaranteed investments.”