Financially impacted by COVID-19? A personal-finance expert answers your most pressing questions
How to approach issues like cash flow, mortgage deferral, retirement investments and more right now
If you've been laid off and are wondering how to juggle rent and bills, have seen a reduction in income and are concerned about your finances, or are feeling anxious about your financial security in these uncertain times — know that you're not alone.
In just a matter of weeks, the impact of the COVID-19 pandemic on the finances of Canadians has been swift and unprecedented. Over a million individuals have already filed for Employment Insurance (EI) benefits, and the government is expecting up to four million applicants for its new Canada Emergency Response Benefit (CERB).
For answers to some of your most pressing personal finance questions related to COVID-19, we talked to Shannon Lee Simmons, a Certified Financial Planner (CFP), Chartered Investment Manager (CIM) and founder of the advice-only financial planning firm The New School of Finance. Here are her tips on how to deal with a financial emergency, and suggestions on how to approach issues such as cash flow, mortgage deferral and retirement investments right now.
Note: This is a rapidly evolving situation. Government programs and specific benefits related to COVID-19 may change in the coming weeks; refer to official websites for the most up-to-date program details and guidelines around eligibility.
What is a financial emergency?
According to Simmons, there are two types of emergencies that can negatively affect your finances: when you have a large unexpected, expense that comes up (such as a leaky roof that requires repair), or when income is unexpectedly cut off. With the COVID-19 crisis, a lot of people are experiencing or are worrying about the latter scenario. "An unexpected layoff, or a massive slump in sales if you're self-employed, would be an emergency [because] the income tap has been turned off," says Simmons.
What are some steps I can take if I'm experiencing a financial emergency related to COVID-19?
First, address the gap between your income and your expenses. "You want to fix that gap as soon as possible," says Simmons.
If your income has been disrupted or if you've been laid off, start with finding out if you qualify for regular EI benefits or other government programs like the CERB. "Your future cash flow is your biggest asset and your best friend right now," advises Simmons. She notes that many of the government's initiatives related to COVID-19, including the CERB and the wage-subsidy program, are still being rolled out and it might take time for you to access support and receive funds.
Once you know what if any money you can expect through those programs and/or any regular income sources, look to where you can lower expenses. "In an emergency, you can slash expenses in ways that may not be sustainable over the long run," says Simmons. "I'm usually really against slashing expenses because, much like a crash diet, it's not sustainable; I think it sets a lot of people up for failure... and it adds to this cycle of guilt." But in a financial crisis, Simmons suggests pausing things like subscriptions to lower your monthly expenses, and diverting money budgeted for things that are on hold, like daycare fees and extracurricular activities for kids. "All that money that used to go out the door every month is now not … that should provide a little bit of breathing room, so that the money that is coming in can go toward paying bills, keeping a roof over your head, and buying groceries," says Simmons.
If I'm still working but am concerned about my future income stream, what are some preemptive actions I can take?
Use any money that has been freed up to pay down debt, suggests Simmons. "If you have a little bit of debt, whether it's on credit cards or on a line of credit, funnel money now toward [it] so that if you have an income disruption down the road, you wouldn't have to make those minimum payments every month," says Simmons. "Plus, you're saving the interest on [the debt]."
If you don't have debt, Simmons suggests starting to build an emergency fund that covers your spending and bills for at least a month. "Ideally, we want to have three to six months' worth of emergency money saved up, but that's not practical for a lot of people," says Simmons. "In an emergency, the goal is at least one month [of expenses]."
Interest rates are ultra low right now. Should I try to renegotiate debt?
This is absolutely a good time to talk to your mortgage broker, says Simmons. If you have a mortgage with a higher interest rate, for example, they can help you calculate what the potential savings (and penalties) might be if you were to renew your mortgage early. Simmons adds that depending on your specific situation, you might want to discuss with your broker whether you should break your mortgage to roll in credit card or other more expensive debt into a new loan at a lower interest rate; the broker can tell you all of the costs involved, and what your monthly payment would be. "They can crunch the numbers and let you know if it's worth it or not," says Simmons. "If you have an opportunity to roll in debt at lower interest rate, that's always a good financial planning practice to take."
Who should be taking advantage of the mortgage deferral program?
Simmons recommends mortgage deferral only under the most serious circumstances: "If you've lost your income source and the EI programs that are coming in, whether it's regular EI or the Canadian Emergency Response Benefit, is not sufficient to pay your mortgage, bills and grocery and living expenses." If a deferral allows you to avoid taking on expensive credit card or line of credit debt, then it could be a good option that can help you "breathe a little bit easier," says Simmons.
But if your current income (even if reduced) is sufficient to cover your very basic expenses, Simmons recommends that you don't defer mortgage payments because, as she puts it, you would simply be "funding debt with debt." You're not getting out of making payments for that period of time; those skipped payments and the interest that you owe the bank will be added to your mortgage. "As the mortgage deferral programs have been outlined, the banks [would be] essentially lending you that money," says Simmons. "It's basically compound interest, you're paying interest on the interest that you already owed," she explains.
Should I be worried about my investment and retirement accounts?
If you're in a situation right now where the market value of your investments have dropped significantly but you need to take a significant portion of money out, Simmons says one strategy for retirees is to take Registered Retirement Income Funds (RRIFs) payments for the year monthly, instead of in one annual payment. "Hopefully [then] you're minimizing damage, or at least diversifying what the potential market is doing over the course of a year," says Simmons. "By taking whatever that targeted annual payment is, and spreading it out over smaller, more incremental monthly withdrawals, we can use that dollar cost averaging strategy … and try to smooth out the losses." (She also notes that for 2020, the government is reducing minimum RRIF withdrawals by 25 per cent.)
Ideally, anyone who is retired or looking to retire soon would have at least one year to 18 months' worth of living expenses sitting in a cash-like product such as a GIC, suggests Simmons. "Then, if there's a market crash .. you don't have to pull out money while your investments are low, and you can relax and wait for things to correct," Simmons says. "In the future, that's a good practice for everyone to get into."
Simmons advises against taking any extreme measures right now when it comes to your investments. "The goal for everybody should be not to panic, as hard as that is to do," says Simmons. "I think staying the course of whatever plan you've got going on is the smartest and calmest thing to do right now." And, if you can, avoid looking at your statements or investment apps for now; it's unproductive and can create anxiety. "Unless you intend to do something about it, it is useless information," says Simmons. "It doesn't even mean anything; [the numbers] could change tomorrow."
Truc Nguyen is a Toronto-based writer, editor and stylist. Follow her at @trucnguyen.