The economic impact from COVID-19 continues to be felt by almost everyone as job losses mount. Being on top of your finances is now more important than ever. For those of us that are fortunate enough to still have an income, it’s key to start building a financial buffer in case the unexpected happens and your next paycheck never comes.
Many people believe that this kind of an emergency fund should cover your essential expenses for 3 to 6 months. But, since many Canadians are currently in debt, building that kind of savings simply isn’t realistic in a short period of time. That said, you can still take steps towards being in a better financial position even while you’re staying at home.
Everyone’s situation is unique, but the basic idea of building your financial buffer quickly is simple – temporarily reduce all your expenses, focus on paying off your high interest debt, and then start saving up. Let’s get into it.
The 50/50 budget
This is essentially a modified version of the 50/30/20 budget. You’ll focus on putting as much as 50% of your paycheck towards building your financial buffer, while doing everything you can to bring down your expenses on your needs and wants so they’re only taking the other 50% of your income. This short term plan will help you get through these uncertain times and help build up your financial buffer as quickly as possible.
- Needs – Essentials or other fixed expenses for living, such as food, housing, and utilities. Based on the 50/30/20 budget, this is usually where you don’t want any more than 50% of your net pay going towards. Our goal is going to be to get this down as low as possible.
- Wants – Expenses on non essentials, such as subscriptions, entertainment, new clothings, or any luxuries. In normal times, your target for this category is 30% of your net pay, but in an emergency like this, our goal is to get this down to almost zero.
- Goals – Normally, this is 20% of your pay that is going towards saving, investing or paying down debt. We’re going to adjust this to focus on creating a financial buffer.
1. Get a good sense of how you’re spending now
Your after tax income is spent on these 3 categories: needs, wants, and goals. Given most of us are currently staying home, how you’re spending now is likely different than before.
Food is essential, but how much you spend on it can vary greatly. You need to see how low you can get it to. It might be more difficult to get groceries now, but it’ll be cheaper than ordering take-out or delivery meals. Research pricing and make a plan to buy essential items in the most cost effective way before you head to your local grocers.
Your heat and lights are essential, but are there ways to cut the monthly costs down? Some provinces, like Ontario and British Columbia, have lowered their rates or are offering other relief. Is your phone’s data plan necessary if you’re mostly using wi-fi? Many providers are offering assistance now so contact them to make sure you are on the lowest cost plan possible and take advantage of any available relief.
If your income has been affected you may qualify for up to 6 months deferral on your mortgage, which could have a big impact on helping you build up a buffer. If you are renting you need to talk to your landlord and try and negotiate a lower rate for a few months. Many landlords and lenders are offering reliefs such as payment deferrals to affected Canadians, and certain provinces are offering rent subsidies.
Typically an essential, but with most of us working from home this expense should be way down. If you have a car payment, reach out to your lender and see what options they have available.
Paying for extra insurance on anything you don’t need? If you’re not driving to work anymore you may be able to change your car insurance to pleasure use only to save some money.
2. 50% Needs – reduce your spending on your needs
It may sound odd to reduce your spending on essentials, but too often what we consider a need isn’t actually a need, which means that you have room to lower this spending:
While it’s important to have some form of entertainment, it’s likely not essential to have all the different subscriptions plus cable TV. Go through everything you have (Netflix, Apple Music, Spotify, etc), pick one that you’ll use the most and cancel all the rest.
If you’re staying at home most of the time, just keep yourself comfortable with your old sweatpants instead of shopping online – no one’s judging!
- Any other luxuries
Cut all spending on non-essential commodities and luxuries, such as home upgrades, new tech and games, or booze (we know this can be a tough one). Certain spending on self-care may indeed be essential to keep ourselves sane during this pandemic, but be very honest with yourself and eliminate what you don’t need for now. Remind yourself that the point of these temporary sacrifices is to reduce financial stress if your income situation changes.
3. 0% Wants – temporarily stop spending on your wants
While spending on your wants might be lower now than before, you need to start cutting these expenses out for now. This may sound tough but it’s a key step to make quick progress, and it’s only temporary. Bottom line, you will be surprised to find out how little you really need.
- Pay off your high interest debt
After you’ve minimized your spending on your needs and wants, you’ll have more to put towards your financial goals. Your initial step is to pay off your high cost debt such as credit card debt. Since the high interest debt costs much more than what you can possibly earn from any savings account, paying this off first will help you lower your monthly interest expense. At the same time, if you are paying down credit cards, you’re also regaining your available credit so you can re-access it in case of an emergency – this is your initial financial buffer.
Many credit card providers and lenders (such as Tangerine) are also offering relief solutions. Contact yours to see if they offer any options for payment deferral or reduced interest rate and ensure that they won’t impact your credit score. If you have other debts but the interest cost is low, such as your mortgage, you should keep making minimum payments on those for now.
- Start building your emergency savings
Once you’ve paid off your high cost debt, you can now shift to building your emergency fund. A typical emergency fund should cover 3 to 6 months of your needs. That may sound like a long way to go, but start small and focus on making progress. Try to set your first saving target at $1000. Do your best and you’ll get there!
Your emergency fund will help you in a time of need without having to go back to high cost debt. It should be easily accessible, meaning you shouldn’t be investing with it, but instead saving it in a High Interest Savings Account so you can use this money whenever you’re in an emergency. For example, Tangerine currently offers a HISA with 2.8% interest.
4. 50% Goals – Building a financial buffer
Remember the key is progress, not perfection. So even if you’re not able to save right away, paying off your credit card debt will be a great start. This process will help you develop better spending habits. This is a key financial health habit when it comes to achieving your future money goals.
What else can you do?
Aside from cutting down on expenses, you can also find ways to increase your available cash to put towards your goals.
- Get your tax refund
On average, about two-thirds of Canadian tax filers receive a tax refund. If you’re one of them, the earlier you file, the sooner you’ll be able to get that money. You can either file your taxes online yourself using tools such as TurboTax, or with paid professional assistance using H&R Block.
- Get a temporary side hustle
There might not be as many traditional ways to make extra money right now, but there are still options, such as user testing, focus groups, proofreading, and other remote jobs. Take a look at sites such as Upwork and Fiverr for options.
If your income has been reduced dramatically due to COVID-19, check out the job loss action plan on what you can do.
Remember to stay calm and stay cautious
As the pandemic evolves daily, it may be difficult to keep a clear head in these chaotic times, but don’t let panic overrun your common sense. Remember not to overspend or over-buy essential supplies. Watch out for scams related to government benefits, as fraudsters have already started preying on consumers' fears and spreading misinformation, so be cautious with phone calls, emails, and texts regarding COVID-19.
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Don't lose sight of the reality that "right now" won't last forever. Let's continue to support each other through this ever-changing chapter.
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