How to sanitize your personal finances
A 5-point prescription for keeping your bank balance healthy
The COVID-19 pandemic has thrown many families’ financial plans into disarray. And while restrictions are gradually being lifted, activity is still far from normal. And, if the experts are right, there’s still the threat of a secondary wave of infections to contend with in the fall. Most everyone is washing their hands frequently and using masks in public spaces to stay healthy. But what about your finances? Here are five smart ways to sanitize your finances to make sure your bank balance doesn’t end up in the ICU.
No. 1: Budget
Budgeting may be a dirty word for many. But it’s essential to get a fix on what funds you have and what expenses and costs you need to pay.
First on the list is to find out whether your current income, savings, and government benefits cover your expenses for the next four to six months. If they don’t, look for ways to cut those costs, especially discretionary expenses like frequent takeout or ordering in meals. Online shopping sites are another budget killer. And don’t forget to look for and eliminate recurring “ghost” expenses you might have forgotten about, like automatic withdrawals or credit card charges for fitness classes.
Reduce fixed costs if you can, like mortgage of rent payments, depending on your lender or landlord. And take advantage of every cost reduction available, some insurers are offering temporary reductions in auto and health insurance premiums.
No. 2: Income and savings
If you have a job and can work remotely from home, consider yourself very fortunate, as millions of Canadian have become unemployed, some permanently. If you fall into the large category of unemployed or underemployed, take stock of all potential sources of income. First and foremost, of course, this includes applying for government-funded emergency income benefits, such as the Canada Emergency Response Benefit (CERB) and the Canada Emergency Student Benefit (CESB).
If you are still employed and are building up a cash balance because you haven’t been spending as much, set up an emergency fund now, consisting of a minimum six weeks’ of your net pay to start, raising it gradually to two months of net pay. If the next wave of COVID-19 is as bad as this one, you may need it sooner than you think.
No. 3. Manage personal debt
Many Canadians are facing the prospect of debt payments coming due while cash flow is drying up. This highlights the critical importance of always keeping debt-funded discretionary spending under control. Now may be a good time to scale back on free-form discretionary spending, using any savings generated to pay down high-interest debt, like credit cards, first.
If you’re in dire straits, you might choose to defer payments if that option is offered to you by the lender – whether credit card or car payments or other personal debt. It’s not a path I would recommend except as a last resort, because that debt doesn’t just disappear – it’s “deferred,” which is a bit of a loaded term. You’ll still have to pay that deferred amount back, with interest, along with your regular future payments.
No. 4. Refinance the mortgage
The Bank of Canada cut its policy interest rate to one quarter of one percentage point (0.25%) on April 15. And the prime rate and other interest rates that key off the prime, including mortgage rates, were cut right along with it. A 5-year fixed-rate mortgage was recently available at 2.19%, while a 5-year variable rate mortgage was available for 1.95%.
One way to take advantage of lower rates is to restructure debt if possible. And for most people, mortgage debt is the biggest one they have. Depending on your lender and the type of existing mortgage you have, you may be able to renegotiate your mortgage at a lower rate, possibly saving thousands of dollars in interest over the amortization period. But you’ll have to do some intensive number crunching, because there are penalties and costs involved.
No. 5. Investment strategy for beginners
If you don’t already have one, open a Tax-Free Savings Account (TFSA), and use it to invest in a diversified, balanced portfolio. TFSA contribution room is cumulative since the inception of the TFSA some years ago. So if you’re starting today and have never contributed before, you can contribute up to $69,500 to your account.
If you’re not a do-it-yourselfer, there are many good mutual funds and exchange-traded funds that provide a one-ticket solution to investment diversification through an actively-managed, balanced portfolio of stocks and bonds.
If you have a TFSA, and have contribution room carried forward from previous years, use extra cash to top it up.
Start an investment program now and keep that savings habit going when the economy re-opens down the road.
Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at firstname.lastname@example.org for a confidential planning consultation.
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