How to stay financially prepared in the next normal
Staying financially prepared

We often read about financial planning for emergencies, but COVID-19 turned that hypothetical “emergency” into actual reality for millions of Canadians at the same time.

The initial outbreak has given us both a wake-up call and an opportunity. No matter how you were impacted, it’s more clear than ever that a financial plan designed specifically to get us through a crisis is key.

While the first initial wave of the outbreak is receding and provinces are re-opening at their own paces, from a financial planning perspective we’re left in an awkward phase in the middle. We don’t know how long the COVID-19 pandemic will last, how our economy will react, or how long it will take for employment rates to recover.

This is a time to balance being ready for anything with a long-term outlook. These six steps will help you stay financially secure over the next three months to two years — no matter what events they bring.

1. Pay off new high-interest consumer debt as fast as you can

As a general rule, carrying any consumer debt is the enemy of financial security. If you dipped into yours more than normal to get by during the pandemic, don’t feel guilty. Many Canadians were in the same boat.

Every time you keep paying interest on that debt, it’s taking away from your ability to build your savings and get back on top of your situation. Getting it paid off, or even lowered as much as you can, is priority #1.

Most Canadian banks created debt relief programs in the wake of COVID-19. If you haven’t talked to yours yet, start by calling and finding what they have available.

2. Set up a low-interest safety net

Low-interest debt is different. When used wisely, it’s a smart way to have access to cash when you need it without taking a detrimental hit to your future by having to pay off massive interest rates.

If COVID-19 has left you a little shaken and you’re looking for an added financial buffer for the future, you’re not alone. Interest in low-rate credit cards is up 36% since the beginning of the pandemic.

Commonly, it’s better to have a few key credit accounts that you know you can manage responsibly. Having an extra low-interest option already set up to help you through a rough patch can make a lot of sense. If you’ve got the self-control to only use it for real emergencies, then it can be extremely useful and help you keep afloat while leaving your savings intact.

  • Open a low-rate line of credit. And then forget that you have it. Seriously, hide it however you have to.
  • Negotiate with your credit card provider or move to a lower-rate credit card. Perks like travel rewards are nice, but be honest with yourself if you really need them right now. (Hint: you don’t.)

3. Create a secondary “crisis budget”

Fail to plan and you plan to fail. A budget is the cornerstone of smart financial planning, but with sudden loss in income and dramatic shifts in how we live and spend your previous budget (you had a previous budget, right?) probably doesn’t work as well as it used to.

Having a temporary crisis budget ready to go is one less thing to worry about when your financial situation changes overnight. Use one to:

  • Account for rapid and constant changes in your income
  • Adjust lifestyle spending based on how much you’re making that month
  • Focus on covering your fixed expenses first, savings second, and extra indulgences third

Budgeting apps let you easily input changes and adjust your totals so you can see what you can and can’t afford based on shifting income each month.

4. Get back on your savings track ASAP

The pandemic threw all of our lives into disarray. Nearly two million Canadians lost their jobs and 44% of us reported a decrease in our incomes.

Many of us don’t have extra money to spare to build our savings right now. Or, rather, we don’t think that we do. Setting up automatic withdrawals to a separate savings or investment account is a great hack in any situation, and it makes people more likely to save.

Saving any amount is better than none. You might have read about the magic of compound interest before. Even in the short-term, saving $25 each week can add up to give you a little relief from unplanned expenses if they pop up in the near future.

5. Stay the (investment) course

More than half of Canadians said that their long-term investments and retirement savings took a hit because of COVID-19. While the economic shocks, and corresponding market drops, from the initial weeks of the outbreak were certainly dramatic they’re not necessarily unexpected.

When it comes to our investments, tough times make it easier to lose sight of your long-term plans, panic, and make snap decisions that will hurt you in the end.

You might feel that you don’t have the extra money to continue investing. And you may be right, but make that decision based on data and not just feelings. Following the first four steps above will give you the numbers you need to know if you can keep affording to invest or if you need to cut back.

Remember that most consumer investing — for retirement, home ownership or education — is playing a long game. There will be significant ups and downs along the way, but over time the trajectory steadily moves upwards and you increase your wealth.

Every ten years or so we see a major financial collapse. The bubble in 2000, the financial crisis in 2008, and now the COVID-19 pandemic in 2020. While this time around is definitely unique in that it’s a global health crisis with very serious consequences, the fact that something financial happened this year in and of itself isn’t surprising.

What this means is that, if you have the ability, you should generally keep investing just like you were before. Panic-selling or trying to time the market is a recipe for disaster, and most financial experts recommend strongly against it for non-professional investors.

6. Reevaluate your risk tolerance

Our financial lives are inherently emotional. After all, they’re intrinsically tied to our security, happiness and ability to care for ourselves and our families. These are extremely emotional points of view, and they should be.

That said, our investment risk tolerance, as much as possible, should not be based on our emotions.

Once you’ve gone through your situation, evaluated where you stand, and determined what amounts you’ll continue investing, it’s very fair that your risk tolerances might have changed. You want to make sure each of your investments is on the right time horizon to give you what you’ll need when you need it. This might mean becoming more or less aggressive based on your individual plans.

Do an audit of all your investment accounts and talk to your financial advisor to make sure that you’re comfortable with how they’re set up and are still increasing at the rates you expect for you to match your goals in the next two, five and 10 years.

As difficult as the last few months have been, try to keep your eye on the prize. If you’ve got more than 10 years until retirement, there’s still lots of growth to be had and you probably want to leave everything alone or even increase your risk.

If you’re planning on buying a home or making a large withdrawal relatively soon, say the next 2-3 years, then you should consider moving to a more conservative mix to keep as much of that money ready as possible.

A little bit of planning today can go a long way to setting you up for greater financial security tomorrow. Above all, don’t beat yourself up about what you did or didn’t do at the beginning of the pandemic. Nobody was prepared for it, and many of us did whatever we had to do to get by, protect our families, and survive.

Give yourself a pat on the back for caring about doing better, and use that as motivation to start planning for the next time financial uncertainty comes your way.

Jeremy Elder is a paid spokesperson of Sonnet Insurance.
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