5 Financial Tips for ANY Time of Change & Disruption – Part 1 of 2

April 29, 2020

With more than a million Canadians losing their jobs in March (and April numbers threatening to be even worse), I think it is fair to say we are living in unprecedented times. By mid-April, over 6 million Canadians had already applied for the Emergency Response Benefit. And while we are all eagerly anticipating the lifting of restrictions and a return to a “new normal,” leaders have been quoted as saying it is not likely to be a light switch effect, but more of a dimmer.

The analogy is cute but far from comforting.

Staying safely at home and – with an end to our children’s normally hectic schedules – I have had more time than usual to ponder what this pandemic can teach us. As such, I have compiled a list of 5 tips for getting through any time of change and disruption (let us hope that “next time” is no time soon). The first three of these tips will be included in this month’s Invested Mama Minute. You will have to tune in next month for the exciting conclusion .

Tip #1 – Maintain a “healthy” Cashflow Plan

As a writer, I know that words matter. While one could argue a cashflow plan and a budget are synonymous, I think the distinction is very important. One implies a level of control and the other a level of scarcity. A Cashflow Plan analyzes not just inflows and outflows of cash, but also identifies your goals and values. For example, depending on my living situation, my fixed expenses may be very different from yours. My short-term objectives may include saving for a trip (someday!) and yours may include eliminating credit card debt. My long-term goals might include funding a child’s education and yours a cottage on a pond. Regardless, a Cashflow Plan is full of hope and intention. A Budget can often serve to remind us of what we are lacking.

What they do share is that both force us to take stock of where we are and where we have choices to make. Ideally a Cashflow Plan should have these healthy parameters:

  • No more that 55% of net income directed to fixed expenses;
  • Approximately 10% of net income each for short term (keeping you motivated) and long term (more meaningful) goals
  • The rest – 25% of net income – is the money you can spend on whatever you like (which will include food and fun!).

Once you take the time to take stock, set aside 15 minutes per week just to track your progress. Out of sight in terms of cashflow rarely takes it out of mind. In fact, I find a little attention can free your mind for other things and provide more control that you thought possible. Even in times like these.

Tip # 2 – Debt or Savings? That is not the only question you need to answer.

As a Financial Advisor, I get asked this question several times a week. And the answer is always the same: “It depends.” To answer the question, you must first complete an overall Cashflow Plan (see Tip #1). Rarely does it make sense to have a savings plan in place earning 3% when you are paying the minimum balance on a credit card charging you nearly 20%. To answer the question, you must also ask the question, “What am I trying to accomplish?” In addition to knowing your overall cashflow picture, interest charges and interest earning assumptions, you should also identify your net worth. Paying off a debt will likely do as much to improve your net worth as accumulating money in an investment.

You also need to consider whether investing in an RRSP, TFSA or non-registered account makes the most sense for you and factor the impact on your taxes into your decision-making criteria. If your income is likely to be lower this year, perhaps you could forgo the benefits of an RRSP in lieu of continuing to pay on your mortgage, increasing your net worth and saving interest costs in the long term. Your RRSP room will still be available when your income is back to normal and the deduction could be put to better use.

As for trying to time the market and take advantage of the current “on sale” environment we find ourselves in, I would suggest that you only do that once you have considered all the previous questions. It is a proven fact that time in the market is almost always better than trying to “time” the market. Invest knowing your tolerance for risk, your timelines, your overall goals and your interest assumptions. Regardless of the market situation, these tied and tested guidelines will rarely lead you astray.

Tip #3 – Home Equity – When (and How) Should You Use it

With interest rates at an all time low, many people are looking to use the equity in their homes to consolidate higher interest debts and lower their overall debt carrying costs. While I would agree this is a great cashflow management technique, there are a few things to note:

  • If you are using home equity to pay off debts with higher interest rates, try to keep the same repayment period on that debt as it would have had pre-consolidation. For example, if your intention would have been to pay off the credit card balance in 24 months, blended into the mortgage and paying if off over 10-15 year period really will not save much interest in the long run. Consolidate in a way that still allows you to subdivide your debts within the mortgage, maintaining control and appropriate payment timelines. How do you eat and elephant, after all? One bite at a time!
  • I often advise retirees to put home equity lines of credit in place before retirement even if they have no need for debt consolidation and may even own their home. It will be easier to qualify when you can demonstrate good income and you will have access to equity for home repairs or emergencies if needed while on a likely reduced retirement income.
  • Similarly, persons who are self-employed or work in project based or seasonal industries should apply for secured lines of credit before they need it. With at least 20% equity in your home and good overall debt servicing ratios and credit scores, you can normally qualify once you can show two years of consistent income. While you should not do this with the intention of treating it like a blank cheque, it is much easier to qualify when you don’t need it then be looking for access when you are backed into a financial corner.
  • To avoid penalties, it is best to consolidate when your term is up for renewal. Some lenders will even waive appraisal and legal fees. If you don’t ask the question, the answer is always “no!”