The COVID-19 pandemic is taking its toll on the Canadian economy and it’s becoming clear that we may be in a prolonged recession. Chris Gandhu, a High Net Worth Planner with TD Wealth, says either way, now may be the time to take proactive steps to survive the slowdown.
“Knowing how to defend your finances may be the first step in mitigating any financial pain that may be coming”, says Gandhu.
Before making wholesale changes to your finances or dismissing your retirement dreams altogether, get some professional advice, says Gandhu. Most long-term investment portfolios and plans are made to withstand worst-case scenarios and should bounce back over time.
Here are some ideas he offers that may help you survive a recession.
Get a handle on debt
Nothing will hurt more than having high-interest debt (read: credit cards and payday loans) when your finances are squeezed. You may be able to alleviate some debt by having a low-interest home equity line of credit (HELOC) where you can consolidate your higher-interest debt, so long as you don’t look at it as free money to spend. If you don’t own a home, you may still be able to get help to merge your debt and keep it under control. Also, if you are having trouble paying your mortgage, there are relief measures now in place that defer payments for up to six months. Reach out to your financial provider.
Cut unnecessary spending and make a budget
If you are like most Canadians, you may be stuck in the house for days on end. It may be tempting to let online shopping help alleviate the boredom. However, if events take a turn for the worse and you find yourself without income, you may be glad of any cash you are able to save now. Consider putting a budget together to examine how much cash is coming in, how much is going out and what your short- and long-term priorities are. Part of your budget will be to determine what non-discretionary things you have to pay for (car payments, utilities, rent or mortgage) versus the discretionary spending you could get by without (gaming consoles, eating out, landscaping the yard). Planning, budgeting and saving now may put you in better shape if your situation deteriorates.
Consider getting frugal as you can. Depending on your situation, you may even consider selling the family cottage or a second car. While it may seem painful to you and the family, preventative actions like this may stave off being forced into more dire problems later.
Have cash on hand and save if you can
Depending on your situation, tucking any extra cash into a high-interest savings account could give you a place to turn if you encounter unexpected expenses, like a home or car repair bill. It may mean you won’t have to dip into debt to pay your bills.
If you are in immediate need for cash, one move that you can make is to withdraw money from a Tax-Free Savings Account (TFSA). Since there is no tax consequence of withdrawing from a TFSA, it makes more sense to do that rather than take money from a Registered Retirement Savings Plan (RRSP).
Gandhu says that future savings with an RRSP may still bring benefits. It can lower your taxable income and lead to a tax refund, and every contribution still helps towards retirement savings even if you only contribute a fraction of what you normally contribute. For the difference between TFSAs and RRSPs, watch this video.
Treat your credit like gold
If you have a great credit score and a low debt load, you’ll be in a position to get preferable lending rates if you need it. You can keep your credit score healthy by paying all bills on time if not in full. If your credit is not what it should be, ask your bank how you can repair it. It may mean paying off credit cards efficiently or fixing old credit issues, but the better your credit, the easier it will be if you have to take out a loan.
Revisit your retirement plan
If you are close to retirement and your savings have taken a beating on the market, you may wish to reconsider parts of your retirement plan. This could entail working longer than you planned, making a plan to save more aggressively when you can afford it or downsizing your lifestyle expectations in retirement. Also consider that if you do decide to work longer, you may wish to defer your Canadian Pension Plan and/or your Old Age Security which will allow those plans to grow.
If you have a pension from a previous company while you continue to work at another job, you can take that pension earlier than planned to help see you through, although it will be at a reduced rate.
Taking the commuted value of a pension (essentially the lump sum payment of what your pension is worth) may also be a consideration, but you should be mindful of the large tax consequences. Also, once taken, you have to manage that money carefully for the rest of your life.
Be a star at work
A steady pay cheque may make all the difference right now so make sure you’re essential at work. If you’re feeling the squeeze at this time, so might your employer. Now is a great time to be the employee who helps solve their problems and guides them through to better times.
Continue your education and upgrade skills
If time allows, bulk up your resume and see how you can hone your skills and make yourself more valuable to your employer – or to a future employer if you are suddenly unemployed. This can be formal, certified training for your occupation or it may be more casual learning on the internet.