One of the takeaways I think we can all agree on from the current COVID-19 crisis, is that there is always a possibility of something unexpected occurring, and that it can affect us in ways beyond what we could have imagined.
Today's recession is extremely unique in that there were no major excesses in the economy to cause it. It is being caused by the decision to shut the economy down in hopes of flattening the curve, to avoid ending up in similar situations to places such asItaly, Spain, or New York. If you're one of the MANY Canadians whose ability to earn an income is being affected, hopefully you have a safety net in place to fall back on.
In our experience in working with multi-generational families, we have learnt that life comes with a fair bit of unpredictability and it is better to be safe than sorry. Having some form of safety net is good whether we look at it from a personal or business perspective. In the case of emergency funds, the personal risks we're often talking about include unexpected expenses, loss of employment income, or medical emergencies. We might want to add government shutdowns due to global pandemics to the list.
I won't get in the details of how much you should have in your emergency savings fund. It's a very individualized topic with no 'right' or 'wrong' answer. Textbooks will tell you to have 3-6 months of expenses stored away in either cash or low earning short term interest accounts. This advice may work for you, or maybe it won't. Regardless of whether you're tight on funds due to COVID-19, expecting a decline of income, or your income is stable, COVID-19 presents a time for you to evaluate your income and expenses and make some informed decisions to protect and grow your families future.
Below I've included three basic, yet helpful steps.
In order to make decisions on your money, you're going to need to understand the monthly cash flow you're dealing with. For those who already have a budget in place, this process will be smooth. You'll likely be updating the income numbers to consider any change or loss of income, but also to account for any government assistance you're either receiving or will be entitled to receive (EI or CERB). Once you have that in order, you'll want to turn your focus to your expenses.
The primary objective here is to begin to classify your expenses as 'essential' versus 'non-essential.' Focus on your spending leading up to the crisis, not during. This will help make your calculation more conservative erring on the side of caution. Generally, 'essential' expenses fall under the following categories: housing, utilities, food, transportation, insurance and medical expenses. Non-essential expenses would include things like clothing, books, streaming subscriptions, dining out, gifts etc. When we're using the word essential, we literally mean essential to survive.
Although, most Canadians hate doing up a budget it's probably one of the best things you can do if you're experiencing any stress or anxiety surrounding your money. No one likes cutting things out that they 'want'. But when the decision is between something you 'want' versus something you 'need', the need should probably take precedence. Most individuals who go through the process end up finding they spend A LOT of money on 'non-essential' items. Knowing this helps to alleviate a lot of your stress. You'll realize that you likely have more money to work with than you originally thought. If you're fiscally responsible to begin with, it's possible you'll have 'non-essential' expenses you can even keep.
With a budget, you'll have the knowledge you need to decide which of these makes you the happiest, allowing you to cut out the ones that don't. If you're still in a tight spot after exploring your 'essential' versus 'non-essential' expenses, you may want to explore whether any of your existing expenses can be reduced or deferred. We've seen the telecoms, banks, and several utility providers come out with programs to help consumers through these challenging times. This is great news and will certainly help to alleviate some of the immediate strain Canadians are facing. With that said, make sure you understand the added consequences of deferring or delaying. There are no 'free lunches.'
You likely have had a few goals you may have been saving or investing for. If you haven't done it before, write them down and rank them according to your priority. From there you can determine how much of the extra cash you have each month, that you'd like to direct towards each specific goal. The typical goals we'll see during this process are things like; a tropical vacation, a new vehicle, children's education, paying down debt, or retirement. There's been no better time to evaluate your goals and make sure your money is being directed to goals you care about most. If you're in the fortunate position of having a fair bit of stability to your income, now is a great time to re-evaluate your spending and ensure dollars are going towards the things you care about most, seeing as there's not much else to spend on at the moment.
You're probably aware that there are a number of opinions out there on how this crisis is going to play out, both health wise and economically. The truth is, we've never been here before, and no one knows what is going to happen next. I'm optimistic about the ingenuity of Canadians and humans at large. Whether we get back to 'normal' or develop a 'new normal, there are lessons to be learned if we look for them. By learning them we can ensure we come out the other side of this better than we went in.
- Brandt Butt, Investment Advisor, CIM
Brandt Butt is an Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Brandt Butt who is an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.
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