It happens very often to me to see my two young boys tremble in front of a delicious cone of soft ice cream (calories very well “invested”!). And when they take too long to help themselves, I am the one who has to wipe their soiled hands and clothes. I wonder at what age they will realize that they have to hurry to taste it before it’s too late!
I’m a little worried that the same will happen with some of your savings this summer.
Have you accumulated cash while spending less since the start of the pandemic? While it is human to want to compensate after such a long period of deprivation, be careful: don’t let that nest egg melt in the sun.
First, a question arises: are we really richer than before the pandemic? Finances and Investments recently released the results of a survey revealing that 46% of Canadians would have saved more during the pandemic, but that 52% of them also said they had nothing set aside for their retirement. Where did the famous savings from the forced reduction of our spending during the pandemic go?
In a context characterized by so much uncertainty, it is likely that many savers have chosen to keep their savings in a bank account. We can also hypothesize that some were more affected by the collateral effects of the pandemic (job losses, reduced income, business closures) and were therefore unable to invest in their retirement. But many others have probably benefited, thanks to the generosity of governments, yes, but also by having reduced their spending.
Maybe they just transferred their expenses from one budget line to another? Fewer restaurants, cultural outings and trips… but more renovations and landscaping. In short, spending on what makes us happy. As a training enthusiast, I can attest to the difficulty of finding sports equipment since the start of the pandemic! And one only has to take a look at the prices of certain building materials to see that the savings can quickly disappear once you get to the counter.
But if you’ve managed to put cash aside over the past 15 months, here are 4 tips to help you get the most of it.
Tip number 1: build a strong emergency fund
To be ready in the event of a problem, the usual advice is to build up a reserve fund equivalent to 3 or 6 months of fixed expenses. The challenge at the moment is to do this without keeping too much cash in a bank account, with no real possibility of return. Because currently, even high interest accounts offer rates so low that their name is no longer appropriate!
If you have good fiscal discipline – and a growth-oriented investor profile – the solution might be to invest for the longer term and temporarily use your home equity line of credit in case something goes wrong.
Tip number 2: invest for the long term
It is easier to resist the temptation to increase spending if the money disappears from the checking account. Although the stock markets remain volatile, I advise you to invest in the markets in order to benefit from the global recovery. For the majority of taxpayers, the RRSP should be the priority. If you have children, use your tax return to then contribute to a Registered Education Savings Plan (RESP) and get 30% government grants, which will also fund tax-free. Without children, the TFSA will often trump the accelerated mortgage repayment.
Tip number 3: consider disability insurance
In March 2020, in the first weeks of confinement, I remember feeling a lot of panic on social media. Many realized that their financial security was not acquired and that their ability to generate income – their health – was their most precious asset.
Given the magnitude of the crisis, the state came to the rescue and remedied the fact that the majority of Canadians live pay to pay. But would you be prepared to suffer a loss of income if you are unable to work? Since you have probably already reduced certain expenses, it would be wise to take out this type of insurance before falling back into your pre-pandemic consumption habits.
Tip number 4: review your budget
What are your really superfluous expenses? It is quite possible that the pandemic allowed you to answer this question. This exercise is essential, especially if you do not have the privilege of benefiting from a pension plan offered by your employer. In addition, the inflationary pressures that characterize the current economy could well cause the cost of living to increase significantly in the coming years. Will you then be ready to adjust your budget accordingly?
I am curious to read you about what the pandemic has changed in the management of your personal finances. I will meet you in August after a few weeks of family vacation, probably cleaning clothes soiled with ice cream! Until then, take care of yourself.