We have gone through the initial shock of the COVID-19 global pandemic, and governments and companies have put in place measures to help Canadians cope with loss of income and other stressors. But even as provinces emerge with different levels of reopening, it’s still worth looking at the things we can do to help put us on stable financial footing – because none of us knows how much longer the new normal will last. From basic budgeting to handling debt, making investing decisions during turbulent markets and maximizing your tax savings, here’s your guide to personal finances during the pandemic.
Budgets: Know how much you’re making and spending
Get a handle on your finances by using online budgeting tools. One that stands out to personal finance columnist Rob Carrick for its simplicity is the free Budget Planner by RazorPlan (which also offers 11 more calculators). You can complete it with just a bit of prep time spent looking at your pay stub, chequing account and credit-card statements.
Try this pandemic personal finance tool from Carrick to figure out how much you’re saving right now and how best to use that money. If your job situation is uncertain, consider saving. If you’re financially secure you should invest.
Savings: Emergency funds and where to park your cash
The economic fallout of the pandemic has driven home the need to have savings in an emergency fund. Ideally, you should have enough cash to carry a few months of mortgage and utility payments and groceries. Many people may find saving a challenge right now, but any amount can help. If physical-distancing restrictions have you spending less, consider putting at least part of that money into savings.
Interest rates have been driven down during the pandemic, the amount varies by financial institution. Rob Carrick suggests draining big-bank savings accounts in favour of alternative banks. You can keep on top of the latest rate information with online resources such as this comparison chart from the Canadian High Interest Savings Bank Accounts website or RateHub.ca.
Debt: Relief plans and HELOC borrowing
If you’re scrambling to pay your bills on time, contact your lender, credit card company or utility and ask what COVID-19 relief plans they are offering to help people in financial difficulty. Canada’s largest banks are lowering credit card interest rates for approved customers (this isn’t an across-the-board measure – you have to reach out to your financial institution). Creditors are not the enemy, Rob Carrick writes, pointing to these helpful tips from Credit Canada on how to talk to lenders if you need debt relief.
If you do fall behind, you may want to go to a non-profit credit counselling agency to work on a repayment plan. This would typically lower your credit score, but it can recover.
If you need to borrow, a home equity line of credit is your cheapest and most flexible option. But be aware that with little notice, lenders can increase the interest rate charged and lower the credit limit (including to below the level that you’ve already drawn down) or recall the HELOC outright. The lender can ask you to repay in full immediately, for example, if you’re delinquent on payments.
Mortgages and auto insurance: Payment deferrals and other measures
A number of companies have been offering deferrals to help get customers through the crisis, including on mortgage payments and insurance premiums. The programs have been popular with Canadians, but it’s important to understand the consequences: The interest on a mortgage not paid during the deferral period is added to the balance owing. This means you will be paying interest on interest, potentially totaling hundreds to thousands of dollars.
For car insurance, make sure you know when the company wants you to pay the deferred amount back – it could be as early as the next premium due date. Find out what your company is offering, and set aside money for when it comes due.
Instead of a deferral, consider the ways you can reduce your payments outright. Ask your insurer about discounts or refunds. If you’re working from home, talk to the company about the fewer kilometres you are driving, and possibly reducing your coverage. Two-car families may want to park one vehicle and adjust coverage accordingly. But consider keeping comprehensive coverage in case of theft or fire. And think about saving more money in the long term by getting rid of the second car.
Investing: Stocks, dividends and asset mix
Stock markets have swung wildly during the pandemic. Whatever they’re doing when you read this, there are some fundamentals investors shouldn’t do including trying to time the market, selling into a slide or buying into a rally, and investing in things you don’t understand. Consider investing gradually by dipping into falling markets, not diving. Use a dollar-cost averaging approach, where you make multiple purchases and avoid betting that the markets are at their low point.
Dividend stocks such as banks and utilities have traditionally been seen as havens that offer a reliable payout even during market volatility. But the economic downturn, as well as the drop in oil prices, has led to many companies cutting or suspending their dividends. So do your research before you invest. Businesses that have been hard hit include energy companies and restaurant operators.
Many investors are reassessing the asset mix in their portfolios as well as risk tolerance and investing horizon. Gordon Pape offers his thoughts on what a portfolio mix might look like during these times. He also advises a review of holdings, and getting rid of positions that are likely to drag down returns for months. And he suggests some stocks to keep – and some to dump. If investors are holding cash for any length of time, Rob Carrick advises using a high-interest account mutual fund or exchange-traded fund. If you plan to trade in the near term, it makes sense to keep cash idling in your account.
Tax matters: Government benefits and working from home
The Canada Emergency Response Benefit is taxable, yet unlike the paycheque it replaces, nothing has been withheld for taxes. So if you’ve received money from the program, you may not get as big a tax refund next year, or end up owing. Try to set aside some money to pay taxes down the road.
Special rules apply to people who work from home, and not just the self-employed, tax expert Tim Cestnick writes. Employees can claim a deduction for some home office expenses under certain circumstances, including your home being your principal workplace. What’s required is that your employer sign Form T2200 (in Quebec, it’s Form TP-64.3-V), and certify in question No. 10 that you were required to work from home more than half the time during a specific period in the year. You will need to prorate your expenses so they relate to that period of time, and claim them on form T777.
Here are further details on what kind of deductions you can claim and how to prorate expenses. And here are more ways you may benefit, including asking your employer for reimbursement for equipment you needed to buy to work from home.
Estate planning: Wills and powers of attorney
There’s a renewed urgency in pandemic times to get your affairs in order. Law firms across Canada are hearing from older clients who want to ensure their end-of-life wishes are still relevant, and from people who want to locate their elderly parents’ documents. Parents are being advised to have power of attorney documents set up with instructions on guardianship of their kids should something happen.
Some provinces are loosening the rules for witnessing. The Ontario government passed an emergency order to allow legal professionals to witness the signing of wills and powers of attorney through online video platforms. Saskatchewan has similar rules in place, and Newfoundland is allowing remote witnessing for the duration of the health emergency. Quebec notaries are permitted to sign documents remotely. While experts recommend drafting a will with a lawyer to ensure clarity, using an online service can be an option in an emergency.
Retirement: RRIF withdrawals and when to take CPP
Seniors who have registered retirement income funds are required to withdraw a minimum amount each year. In these volatile markets, they face eroding their nest egg if they have to sell stocks or equity funds to do it. The federal government has announced it is reducing the minimum withdrawal for 2020 by 25 per cent, as it had done during the 2008 financial crisis. But this time, seniors aren’t allowed to recontribute that 25 per cent reduction if they have already withdrawn it. One step for retirees who don’t want to sell hard-hit stocks in their RRIF is to make an “in-kind” withdrawal of a particular stock or equity fund and then move it into a non-registered account or tax-free savings account.
The standard age for starting CPP is 65, but you can begin as early as 60 with a reduced payment or wait as long as 70 and receive an enhanced payment. The financial shock of the pandemic may be encouraging people to consider the earlier option. There are some cases in which taking benefits earlier may make sense, such as being forced to retire prematurely and still needing to pay your bills and put food on the table. But actuary and author Fred Vettese outlines two good reasons to delay receiving the benefit, involving inflation threats as well as gaining more money down the road.
This guide was compiled by S.R. Slobodian from articles by Rob Carrick, John Heinzl, Gordon Pape, Tim Cestnick, James Bradshaw, Jason Tchir, Sam Sivarajan and The Canadian Press.
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