There are many reasons it can be hard to pull together an emergency fund. Saving three to six months’ worth of readily available cash to pay unforeseen expenses, as some professionals recommend, can seem like an impossible feat. “Even before we’d heard about COVID-19, Canadians were struggling to pay increasing housing costs, and skyrocketing rent, and wages weren’t keeping pace with the cost of living,” says Ryan Lanaus, Senior Financial Planner with TD Wealth. “Even when you aren’t living paycheque-to-paycheque, saving for a rainy day may seem like a luxury.”
Yet here we are. Maybe your business has shuttered or perhaps you are out of work. You may be wondering how you are going to get food on the table or pay the electricity bill. Here are a few points to think about for emergency money when you don’t have an emergency fund.
Apply for benefits
Even if you aren’t eligible for employment insurance, the federal government has instituted a number of benefits that Canadians, individuals and businesses may be able to access. The government has implemented wide-ranging emergency response benefits for many Canadians who are out of work or otherwise experiencing a loss or interruption of their income. For businesses, the government has instituted wage subsidies, credit and low-interest loans. “Research what may be available for you and apply as soon as you are able,” says Lanaus. “There may be waiting periods, or it could take a few weeks for money to reach you, or your bank account.”
This is the time to really consider tightening your belt. That means that every purchase you make should be met with the tough question: “Do I need this now?” Beyond cutting discretionary spending, you may also look at ways you can pare down your life, which could include selling items, or ending memberships and subscriptions you can live without. Consider deferral options that your bank may be offering for mortgages, loans and credit cards. You might also take this time to revisit your retirement plan, reviewing what monthly contributions you’re making toward your long-term goals.
“Many of us have gotten used to going out for dinner or getting take-out rather frequently,” says Lanaus. “Prepared food often has a 300%-400% mark-up. Instead, consider buying your groceries and prepare your food at home. It can save you money and a lot of us now have the time to prepare our meals.”
Considering using tax efficient investment options
If you are contemplating cashing in some investments to keep you afloat, consider any potential tax implications. Using money from, for example, a TFSA can be tax-efficient, since the money you withdraw is tax-free. Using money from a non-registered investment may result in paying taxes on capital gains, while using money from an RRSP will be subject to withholding tax, and will be added to your taxable income for the year. Withdrawing from an RRSP also means you permanently lose that contribution room. “However, there can be exceptions,” says Lanaus. “Sometimes non-registered investments have a capital loss that can reduce your taxes. And, if your annual personal income is expected to be very low, withdrawing from your RRSP may be a good long-term strategy as this could be a year when your taxable income will be at its lowest. Where to withdraw funds is a personal strategy and should be taken with care.”
Assess credit options
If you own a house, a home equity line of credit (HELOC) may allow you to borrow money at a low interest rate. But keep in mind that if you can’t make your minimum payments, you risk losing your home. Other unsecured loans may be available to you, and with interest rates recently being cut, interest might be low, making it more affordable to borrow right now. If at all possible, you should try to avoid using high-interest credit cards and payday loans.
Tracking your expenses and income using your bank’s online app — TD’s is called MySpend — can help you see if you are keeping your head above water. “In an emergency financial situation, you should be continuously adjusting as things change,” says Lanaus. “Monitor your income and expenditures using your bank’s online app, so that you can assess your financial situation frequently.” Check with your financial provider to find more articles and information about managing your finances during this unprecedented time. TD customers can find more information here.