During turbulent times, plan for the best but prepare for the worst. Create comfort, and a cushion, across changing economic climates with these proven money management practices in financial planning, personal banking and wealth management.
Economic downturns and unforeseen life changes often spotlight the importance of good financial planning. Maybe you’re grateful you put the time in. Maybe you’re kicking yourself for putting it off.
Planning well today will prevent panic tomorrow. With these insights, you can build up your personal finance fundamentals and learn what to do when cash flow gets tight.
What can Canadians do to mitigate inflationary impacts?
A prudent financial plan will take into account 2 to 3 per cent inflation. Build that assumption directly into your financial plan and ask what would happen if inflation remained at greater than 3 per cent? How would that affect your plan in the short, medium, and long term? However, no matter how good your plan is, inflation takes a bite out of discretionary cash flow and families can certainly feel the pinch when economic times are tough.
Keeping in mind that cash is king, I recommend taking these proactive steps:
- Have an emergency savings fund in case of job losses or unexpected expenses.
- Know which expenses you can cut back if needed.
- Build up your credit reserves.
- Consider applying for a line of credit.
Applying for a line of credit, not for discretionary spending but so that you can use if you need it. Do it when your credit score is good, not when it’s taken a dive. This could also include a home equity line of credit. If you need cash quickly, you can’t count on selling your home or a hard asset at a moment’s notice.
Work with your financial advisor to ensure you have the cash flow to maintain your lifestyle. They’ll help you look at your budget and identify ways to save money. It’s a good practice to frame goals around a decision or milestone.
Let’s use the age of retirement. What would it take to retire at 55? What would extend that timeline to 60? Maybe you’ll need to work longer, or maybe you’ll just need to work part-time for a defined period. The market is always going to impact how we think about the future. Working with a financial advisor ensures your plan accounts for that. Regularly review the plan with your advisor to ensure you have some wiggle room.
Variable rate mortgages in turbulent times
Say you are a homeowner in a variable-rate mortgage and your is coming up soon. A lot of homeowners are in this situation. Not so long ago, you could get a variable rate for as low as 1 per cent. Mortgage payments these days are taking a bigger bite out of a homeowner’s monthly budget. If your renewal’s coming up, consider the short-term option – like a 6-month or 1-year term.
Extending amortization is another approach a family may want to consider if they’re looking to free up cash. While interest rates probably won’t go back to pre-pandemic levels, it’s very likely they’ll come down in the short- to medium-term. Some of our clients are five, 10 or 15 years into a mortgage. They’re coming up on a renewal and interest rates are significantly higher than they were in the previous mortgage.
To offset that higher payment, look to extend the amortization. It’s not for everyone, but it’s a consideration for clients who have the flexibility. This may mean increasing the amortization for the short-term length. Upon renewal or maturity, we can then look at bringing the amortization back down again.
Best practices for managing personal finances
Good financial management should be a constant regardless of the economic climate. My advice would be:
- Have a good financial plan with up-to-date budgets and cash flow projections to help navigate challenging economic times.
- Frequently monitor what’s coming in and out of your accounts. Adjust the timing of your expenses where you can.
- Regularly review and adjust your budgets and forecasts. Manage your liquidity needs by putting credit lines in place ahead of time.
- Seek advice from your financial advisor. We’re always here to assist you.
And last but not least, never assume small changes in your circumstances mean you don’t need advice. Consider changes to your financial situation, to your debts, your liquidity, and your leverage. They’re all impactful, so don’t discount them. They should be a catalyst for conversations not just with your banker, but also the whole team of professionals you surround yourself with – like your lawyer, accountant, and financial planner. It’s crucial to have regular touchpoints with them.
What would we do? We’d work out a financial plan for you and then go through your current budget, reviewing each item. We’d look at your cash flows and income sources, and then we’d create a new, comfortable budget with enough surplus and flexibility. Working with an advisor makes sense because every individual is different, and the plan should match your circumstances.
How often should someone review their financial plan?
At minimum, I ask my clients to meet once per year. If the plan is more complex, or there are ongoing issues or situations that require more frequent review, then we’ll meet quarterly or bi-annually to ensure we can take timely action if needed.
Invest new monies or use it to pay down debt?
Typically, we’d start with looking at your debts. Is it good debt (tax-deductible) or bad debt (non-deductible). What are the interest rates you’re paying? If it’s non-deductible debt, I’d usually advise to pay it off first. We’d also prioritize higher interest rate debts and then work towards debts that have a lower interest rate. Something else we’d explore is consolidating debts. For example, a home equity line of credit and a collateral-based debt if it meant we could get you a lower interest rate.
Of course, we also need to look at what your return could be if you invested this cash and how that return compares to the cost of carrying the debt. In some cases, you might be better off investing your windfall in the market than focusing solely on paying down your personal debts.
If paying off your debt means facing a significant penalty, we’d look to park the funds in short term, high interest accounts. Many of these accounts have strong rates of return right now. In the case of no debt, we’d put the money into an investment portfolio. Since at this time we really don’t know where the market is heading, we might invest one-third over 30 days, another third over 60 days, and the last third over 90 days. This would lessen the impact of market timing or market declines over the short-term.
The bottomline
With the political winds bellowing in significant changes in Canada, the US and the world, turbulence in our economies and markets are probable. Therefore, I thought it is prudent to devote some time to on how to manage your personal finances in these turbulent times.
Of course, we can never predict what this turbulence could manifest like. The exercise is simply meant to have different strategies at the ready that can reduce or mitigate influence on your financial situation. Reducing risk is primary and an important way of Keeping Life Current.
