It’s time to start preparing for the recession that will follow the coronavirus outbreak.
The measures sensibly being used against the virus suppress both contagion and economic activity. If you’re self-isolating, you’re not spending up to your usual level. Even with the federal government promising support to businesses and individuals, the economy will struggle as consumers go dormant and the global movement of goods is reduced.
Economists at S&P Global Ratings issued a report Tuesday saying there will be a worldwide recession in 2020. Financial markets are adjusting to this eventuality – that’s the story behind the recent plunge in global stock markets and interest rates. Now, it’s time for individuals to prepare for what’s ahead.
The best thing you can do with your money right now is put it in a savings account. Bold investors are looking for bargains in the stock market and that’s a smart move as long as you understand there could be more downside before things start to turn around. But if you feel financially vulnerable to what’s ahead for the economy, stockpile cash in a high-interest savings account.
Fifteen alternative banks were offering savings rates of 2 per cent to 2.3 per cent on Tuesday, according to the Canadian High Rates Savings Account website. These rates may not last long.
Staying at home forces us to eliminate discretionary spending at restaurants, bars, concerts, impulse shopping and more, while at the same time you will spend more on groceries and utility costs such as heat, electricity and water. Over all, you should be spending a fair bit less. Estimate the total amount saved and put that money in your savings account.
Ideally, you should have enough emergency cash to carry you and your family for a few months of mortgage and utility payments and groceries. But any amount of cash, even a few hundred dollars, has value.
If you’re up against it with no cash reserves, a home equity line of credit is your cheapest and most flexible option for borrowing. You can pay back just interest every month and attack the principal when your finances improve. Unsecured credit lines have much higher rates, but they’re still vastly better than credit cards. A credit card is your absolute last resort because it charges interest at levels around 20 per cent.
Parents, what’s ahead economically is going to put even more pressure on you to support your adult children. You’ve helped them with rent, with house down payments and with child-care costs. If you have the wherewithal, see if they need help with expenses in the months ahead. Kids just graduating from university this spring may need help covering expenses if the job market is in rough shape.
Boomers should check in with their aged parents to find out how their retirement investments are holding up. Dividends from blue-chip stocks are likely to hold up in a recession, but expect rates to fall for new money invested in guaranteed investment certificates. There are some okay rates available on GICs right now, but they may not last.
If you can’t pay your bills, find out what options are available to help ease your load. For example, mortgage lender MCAP has announced that it will waive fees for clients who want to delay or skip a payment. With the latter option, you add the amount of the payment to your outstanding balance. MCAP says this will not affect your credit rating.
Non-profit credit counselling agencies recommend you contact creditors before you miss a payment. They say it may be possible to ease the strain on your finances through measures such as interest-only or partial payments. It’s unclear at this point whether using these measures would hurt your credit score, but the result will be worse if you default on your debts.
At some point, you may have to raise cash by selling part of your tax-free savings account or registered retirement savings plan. TFSA holdings are much easier to access – in many cases, you can electronically transfer money from your TFSA into your chequing account without cost. RRSP withdrawals are slower and withholding taxes of between 10 per cent and 30 per cent will apply.
Something you should NOT do: Waste time and mental energy on beating yourself up for financial steps not taken in the past. Focus on securing your future through the difficult period ahead.
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