The COVID-19 pandemic has touched every part of our lives, leaving Canadians feeling especially uncertain about their financial situation.
Small-business owners are struggling, seniors have seen their retirement investments drop in value, and many working Canadians have had their hours cut back or lost their jobs completely – all while also worrying about their health and safety.
“No one saw the global crisis coming, and we’re all feeling more vulnerable than ever,” says Robert Hunt, Managing Partner and Licensed Insolvency Trustee with Grant Thornton Limited’s consumer insolvency practice.
“Many people were in a precarious financial position before the pandemic hit, but what is most concerning is that those who could usually meet their monthly obligations and had a pretty solid financial position have been caught off guard and are now worried about their finances.”
But a crisis has a way of teaching what we need to learn. As the COVID-19 curve continues to flatten and provinces slowly start to re-open, Hunt is “optimistic that the tough times we’re all going through right now will change everyone’s personal money-management habits forever – and for the better.”
Here are six lessons to help inform, reduce and relieve your financial burden.
1. Your spending habits need to adapt.
This pandemic is the first financial crisis to hit Canadians since the 2008 recession, and people have been forced to manage their finances more closely. “It is a very good time to evaluate new and old spending habits,” advises Hunt. “The first step is to understand what income you have coming in and where you are spending your money.” Make a list of priority expenditures such as mortgage or rent, loan payments, groceries and utilities, and create an emergency budget to plan and track every dollar. Once you have a good handle on what you’re spending, determine if you can cut back or eliminate anything. Look at reducing in areas like food delivery, transportation and non-essential online shopping (at Amazon, for example). Later, there will be less need to micro-manage, but you’ll be more aware of the importance of saving, says Hunt.
2. Finances are tied to mental health.
According to a recent report from the Mental Health Commission of Canada, the main concerns of Canadians related to the impact of COVID-19 are personal financial hardship, economic impact and job loss. Research has shown that, if you are dealing with financial stress, you are four times as likely to have trouble sleeping and headaches, and you are twice as likely to report poor overall health. “Unfortunately, a lot of people equate their net worth with their self-worth,” says Hunt. “Getting a better handle on your finances and debt – and having a plan to deal with them – will help you to worry less and to feel better about yourself.”
3. Cashing in your RRSP and other investments now will have long-term repercussions.
Some people may consider dipping into their retirement savings at this time. But you will have to pay income tax on any RRSP funds that you withdraw. Plus, amounts withdrawn must be added to your taxable income. “What I’m really concerned about, though,” says Hunt, “is that essentially you are taking savings from your future self… and you’ll have less savings for your retirement.”
4. Access all available sources of income and explore relief options.
Aside from accessing savings from your emergency fund or Tax-Free Savings Account (TFSA) to make up for lost income, you may qualify for financial assistance from the government. For example, you may be eligible for the Canada Emergency Response Benefit (CERB). It is important to note that, if you receive this, you will have to pay tax on it next year when you do your tax return.
Payment deferral programs are offered by many lenders and utility companies. “Make informed choices and be aware of all the costs and long-term implications of deferral programs,” says Hunt. For example, deferred does not mean waived – you will eventually have to make those mortgage and other payments, and your interest cost may be higher.
5. Avoid more debt, if possible.
Consumer debt is at an all-time high in Canada. According to Hunt, Canada was seeing the highest level of insolvency filings since 2009, even before the pandemic closed much of the economy. The total number of insolvencies from March 2019 to March 2020 increased by 8.4 percent compared to the previous year. Hunt advises people who may now need to borrow more money to manage to “do so only if absolutely necessary and to use the least costly options.” Available funds on a home-equity line of credit would be a good option; a pay-day loan with high interest charges and administrative costs would not. Credit-card purchases are also expensive because of the interest charged. Hunt recommends speaking with your banker about the least expensive borrowing options for you.
6. Bankruptcy is not the end of the world.
The pandemic has affected a large swathe of the population who would never have thought about bankruptcy being an option. “But we are living through an unprecedented time,” says Hunt, “and people are wondering whether they can bridge the gap until they can get back to work.” If not, a credit counsellor or Licensed Insolvency Trustee can help sort things out. “Bankruptcy or a formal proposal of debt repayment to creditors, called a consumer proposal, may absolutely be the best way to put debt troubles behind you,” he says. The Office of the Superintendent of Bankruptcy Canada reported that, in 2019, more than 137,000 Canadians used these options to get a financial fresh start – and they were able to focus on other important things again because their debt problems were solved. A Licensed Insolvency Trustee is the only financial professional who administers formal insolvencies for Canadians. “We helped a lot of consumers to recover following the 2008 recession. As an organization, we’ve got the bench strength, experience and compassion to help Canadians get through this crisis too.”
Contact Grant Thornton Limited for more information. With over 60 offices across Canada, their Licensed Insolvency Trustees and debt professionals are currently available to help remotely.