Your Survival plan – When your payments exceed your income.
Let’s not beat around the bush, these are scary and stressful times. Remaining physically healthy is the priority — and thankfully, most of us seem to be achieving that. However, very few of us can say our current or future financial situation is a healthy as it once was. It’s fair to say our finances have most definitely seen better days. A huge amount of us have been impacted by a reduction in income or have lost our jobs and relying on government subsidies. There is an incredible amount of uncertainty about what might happen next as we enter what some fear will be the worst recession we have ever seen. That is why we want to give you a plan to survive, this isn’t about financial planning. This is about financial survival.
It’s time to ‘Break glass in case of emergency’
Financial emergency means different things to different people depends very much on your situation and your stage of life. Many people are already living in a state of financial emergency and it is exhausting. It becomes all-consuming and every decision is driven by your financial situation and every waking thought involves money. If you are one of the lucky ones, your concerns are how long will my emergency fund last, and when will I be able to replace it? But, for the vast majority, you are facing far more dire questions: Should I buy groceries or pay utilities? This is truly financial emergency. The information is going to cover a few scenarios. As many people are somewhere in the two situations, between but many rapidly approaching the latter.
Scenario one: I have an Emergency Fund
Let’s say you are one of the very lucky ones, you still have some income, and you have been able to create an emergency fund. This does not mean you do not have financial worries. It’s called an emergency fund for a reason, as you are using it during a time of emergency. This now means your main worries are what if I lose my income and how long will my emergency fund last. Sadly, these are concerns of the privileged as many do not have an emergency fund and income is now only government assistance programs.
This doesn’t mean you should not ‘break the glass’, you need to be prepared now more than ever. You are going to be tested and will see just how robust your emergency fund really is. The hypothetical amount determined during a period of financial stability may have seemed adequate back then, but is it enough now?
With the future as uncertain as it has been in decades, the 3 months emergency fund, all personal finance experts recommend, now, potentially seems like a random number plucked from the sky. So, you need to respect it and treat it like it needs to last forever. Until you know for sure your income has returned to normal, this is your lifeline.
Don’t feel bad spending the Emergency Fund.
Firstly, feel proud. You have partially if not fully created a cushion to get you through financial crisis. This is what you prepared for. This is what you made sacrifices for.
Human nature will dedicate that regardless of this, you will still find it hard to spend the money you have spent years saving for and hoping you would never need.
This mindset will serve you well. Remember, just because you have a 3-month cushion for loss of income, doesn’t mean you should not change your spending habits. It also doesn’t mean you should spend it to maintain a lifestyle you previously had when income is reduced. Try and live on the income you have and use the emergency fund for critical expenses that cannot be met on the reduced income. Preserving the emergency fund, where possible will provide extra peace of mind and make it easier to replenish when this crisis is over.
Do not turn to debt instead of using your emergency fund.
In many cases, the quick and easy credit to access in a time of emergency is high interest credit card debt. Everything you have prepared for potentially comes to a screeching halt if you turn to high-interest debt because you are reluctant to spend your emergency fund.
First, cancel the unnecessary subscriptions. We understand, Netfilx is deemed an essential expense right now 😊. But take a hard look at all expenses and what in the short term can be minimized or removed. Fully understand all the relief programs you are eligible for and apply for them ASAP.
If you have any monthly contributions to your RRSP and other investment accounts, stop them. Do not cancel life insurance policies as they will be more expensive to replace. When trying to preserve your emergency fund it does not make sense to use it to keep funding your investments.
As counterproductive as it may seem, don’t recommence investment contributions until your most urgent financial needs are covered and income is stable. This is an emergency plan, missing a few months of investment contributions to avoid debt will put you miles ahead in your long term plan.
Scenario two: I have no emergency fund, but I do have Investments
If you didn’t have an emergency fund or it has been depleted and you are considering cashing out RRSP’s or investments, remember these aren’t technically your emergency fund, these are your retirement fund. This will be a common scenario as many people begin investing before creating an emergency fund. No one expects to ever need the emergency fund and the promise of high returns on long term investments is way more appealing than the low interest savings account used to house your emergency fund.
The challenge now is you are looking at selling some investments, that were part of a long-term strategy during possibly the worst time you could be selling. The markets will recover, but instead of being able to wait it out you need to access funds now. This is still a more enviable position than those without an emergency fund or investments. So again, be proud and do not beat yourself up.
Use investments to meet critical expenses, not pay down unmanageable debt.
If debt is unmanageable or becoming that way, you need to first seek professional advice before cashing out investments to pay off or partially pay down debt. This is one of the biggest mistakes we see and can set back a financial plan by decades.
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If you have little or no debt, it’s better to access these funds versus going into debt. No return on your investments will be greater than the interest rates on your credit cards. Start by looking at cashing in nontaxable accounts first. If you have a TFSA this is usually the first place to start, then look at short term GIC’s and term deposits with zero or low penalties to access the funds. This is money that has already been taxed and can be accessed without any future tax implications. If you need to cash in your RRSP’s, this is taxable income. Some tax will be withheld but not normally enough, so understand what you will need to pay next year and ideally put this to one side. As things improve you will be able to resume contributions to your RRSP which may offset the tax implications on the amount you withdrew.
Scenario three: I do not have an emergency fund and I do not have investments.
This is likely the most common situation for most people. They simply do not have enough income to meet expenses and no cash reserves to fall back on. As with above, avoid taking on new debt if possible. It is better to find expenses and bills you can pay later and defer them, than to take on new high-interest debt.
The first thing to do is deal with your largest monthly expenses. This is usually your mortgage or rent. Call your bank or landlord and ask what payment relief programs are available. Remember, when you defer your mortgage you will continue to accrue interest and it will overtime increase your monthly payment or extend the amortization of your mortgage. So only do this if necessary and not just because programs are available.
Once you have what is likely your single biggest and most important monthly expense taken care of, you can begin working through the list of other payments. Next, call your credit card companies and other lenders, such as on your vehicle. Make a list, starting with debts with the highest payments and work down the list.
Taking on new debt
If it can be avoided, it is best to avoid taking on new debt. If it is the only way to survive, then do it. This still needs to be done with careful consideration. The first step is to create an emergency budget and figure out how much credit you are going to need to subsidize your income each month. Next step is to figure out how much credit you actually have available and on which credit facilities.
This new debt is going to have to be dealt with in the future, so you need to keep it to a minimum and use the lowest interest credit first.
Taking on debt can be exceedingly difficult and emotionally hard for some people. We spend our lives trying to avoid debt. This is unprecedented times and debt is being incurred to meet the needs of your family and not luxury or unnecessary purchases. Go easy on yourself.
This is a temporary situation, things will get better.
When things begin to return to normal, so will your financial situation. It may not happen overnight and all at once, but it will happen. Top of Form
When it does, you need to take stock and assess where you are. If you are lucky enough to come out of this with only a few financial flesh wounds, you have done well and shows you were prepared. Your emergency fund may be gone, and your investments reduced but you have survived. In this case, go back to the plan that got you there in the first place and start again. No one wants to start over but be proud you survived the crisis and learn from the experience.
For many when the payment deferrals are over the debt will be simply unmanageable. You will not be alone; we believe Canada is going to see the highest level of delinquencies and insolvencies its ever seen. It is time to get up, brush yourself off, and tackle this head on. The sooner you acknowledge the debt is unmanageable the sooner you can deal with it. Do not sugar coat it, do not be unrealistic about it and don’t hope for miracles. Being proactive and acting now is going to determine how quickly you can recover from this. This was not your fault, and you have the right to receive proper help and support to get you out of this in the most effective way. This will be one of the most important financial decisions you will ever make. It is imperative you review all your options and get unbiased, unconflicted advice.
Even if your payment deferrals aren’t over, if you know the end result is going to be unmanageable debt, start preparing now.
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For more on this, read the blog below.
Please remember, whatever your situation is, this is unprecedented times and out of our control. You prioritized the health and safety of your family and regardless of how bad it seems, any situation can be resolved with the right plan.
