By Karin Mizgala, co-founder and CEO Money Coaches Canada
This is a hard time to focus on the future. If your employment or income has been impacted by COVID-19, understandably your short-term security and immediate bills are your primary concern. That makes sense, you need to take care of yourself, your family and your community and to make sure everyone is safe and healthy.
Eventually the crisis will pass and things will return to “normal,” well maybe a new “normal,” but one where we can breathe again and start thinking about the future.
There are however, some habits you can change and actions you can take now. It’s important that the choices you make today are in the context of a proactive game plan for both short and long term financial security.
1. Get a good handle on your cash flow
Being isolated at home really puts a spotlight on what makes our lives fulfilling—and it turns out it isn’t binge watching Tiger King. It may also reveal what isn’t important to us. These new insights can help you envision what you want from your retirement.
Take some time to estimate what you think your cash flow needs will be. Some things will change, for example you may anticipate being mortgage free, but you can’t predict what health costs may be down the road for you or a spouse. You can use our Spending and Savings Plan worksheet as a starting point.
How attainable retirement is depends on what your desired lifestyle will cost you and what your income sources will be in retirement (RSPs, pensions, other savings) and whether there’s a gap between the two.
It might feel like the markets or the economy, are the biggest influence on your well-being in retirement, but it’s your cash flow needs that are critical. You won’t be able to assess the impact of the recent turndown without looking at it through the lens of your retirement cash flow requirements.
Are there any expenditures that you would have thought were indispensable before this pandemic forced you to give them up? Are there cash flow adjustments you can continue to make after this is over (it will be over!) that will help close an income/expense gap you foresee in retirement?
Depending on how close you are to retirement, the reality is, you may need to revise your expectations of when you can retire and/or how much you can spend in your retirement years.
2. Make savings a higher priority
No doubt about it, this situation has been a wake-up call for everyone on the importance of savings and cash. If your income is still intact, make a concerted effort to park more money away than usual.
Open a high interest savings account and name the account long term savings. Decide how much you can add each pay and make the payment automatic. When the crisis has passed you can move the money into your RSP or TFSA.
If you have a good emergency fund already, and little debt, then you could consider investing cautiously into the markets.
3. Focus on debt repayment
The needs of the next few months seem much more pressing than the distant future at the moment. Staying healthy today, making sure we have what we need this week or this month. This is especially true for Canadians who have seen a significant reduction in their income.
It can be tempting to consider deferring your mortgage payments to take some of the pressure off, but even if you do qualify, don’t do it unless you really have to. Your goal for retirement is to be debt free, including mortgage free, don’t jeopardize that goal if you can avoid it.
Do what you can to keep all debt payments current and try to avoid using high interest credit cards to finance cash flow shortfalls. Most banks have cut credit card interest rates by about 50% for qualifying customers, but that still means the rate is around 10%. It would be better to reduce your expenses, use savings or a line of credit if absolutely necessary.
If your debt repayment goals are de-railed through the crisis, do everything you can when you get to the other side to get back on track, ideally with more commitment than before.
4. Get more engaged with your investments
The shift from regular life to a massive shutdown of much of the country happened very quickly. It shook our feelings of agency over our lives. To feel empowered for our health we can listen to the medical experts and follow their guidance. To lessen our financial anguish we can take this opportunity to be more informed and involved in our investments.
If you have a balanced portfolio of cash, bonds and stocks, it might not be time now to get out. But the recent market drops may have you in more knots than you bargained for. When the crisis is over, you may want to re-assess your true risk tolerance and rebalance your investment accordingly.
You may find that holding a higher percentage of cash investments has more appeal to you now, even though the returns are low. However, any rebalance needs to take into consideration the fact that a lower rate of return may impact what you can spend in retirement. You’ll need to carefully assess that trade-off.
This unprecedented situation could serve as a gentle (well, maybe not so gentle) nudge to be more engaged and involved with your investments and your investment advisor, in good times and in bad. I‘m not recommending that you manage your own investments; but to see this as an opportunity to evaluate whether you have the right investment plan and the right advisor. Check out the investment check-up for some of the considerations covered in our On Your Side Investment Report Card™ evaluations.
5. Take an honest look at your money values
There are images on social media of the Himalayas clearly visible in the Indian state of Punjab for the first time in decades. With much of life at a standstill, the smog that has blocked their beauty has dissipated. I think for many of us, a metaphoric smog has lifted too, and we are seeing our life and what’s important to us more clearly.
This is a good opportunity for us to reflect on our attitudes, beliefs and values around money. And while it’s true that at the core this is a health crisis and saving lives is the most important focus right now, this is also an economic crisis.
What role does money play in your life? Most of us are doing and spending much less than ever during this enforced slow-down. Perhaps this is the wake-up call many of us needed, to know that we can make do with a lot less. Or maybe it’s not the discovery that we need less money than we thought, but that we want to use the money we have in more meaningful ways.
Many people are making regular donations to their local food bank, or helping out friends or family severely impacted financially. Money can’t buy health but it’s a tool by which you can do great good. Taking a good look at how we use our money and being grateful for what we have, can truly impact our happiness long after this crisis has passed.
You still have choices
Will financial trade-offs have to be made during and after the crisis? Most likely. Will this affect plans you already had in place for your retirement? Quite possibly. But taking charge, getting real with your money and making a new or revised plan, can actually be very reassuring when so much in the world is uncertain.
You don’t have to do it alone. We’re here to help.