How to survive a financial crisis
It doesn’t get any easier the more times we go through something like this. I can say this from experience. But there are ways to minimize the stress brought on by a financial crisis and better prepare for the next time.
Hopefully, you already know some of the rational steps to take during a financial crisis: don’t look at your RRSP or investment accounts. Don’t stay glued to the news channels, Twitter or the financial press. And, above all else, do not panic-sell your investments.
For many, no amount of rational thinking can ease the pain of the first time you watch 30% of your life savings evaporate in a matter of days. Compound this with the uncertainty of the job markets, a growing level of consumer debt, and a general sense of economic uneasiness and we have a financial crisis. The good news in all of this is that there are things we can do to protect ourselves during a financial crisis, and to prepare for the next one.
1) Maximize your savings. Savings accounts, non-registered money market funds, and cashable GICs will help you the most in times of crisis. Their value is fixed and doesn’t fluctuate with the markets. They’re also liquid, meaning you can get your money at any time without incurring a financial loss.
A three-month expense cushion is considered a bare minimum, but some like to have six months or even up to one-year worth of expenses in liquid savings to guard against a prolonged bout of uncertainty or unemployment.
2) Establish a Budget. If you don’t know how much money you have coming in and going out each month, you won’t know how much you need for your emergency fund. Also, if you don’t track your spending you may not know if you’re living at or above your means.
3) Prepare to minimize your monthly expenses. Take a look at what you’re spending money on and see if there are any ways you can trim the fat. Do you have monthly subscriptions you’re paying for that you no longer use? Are you paying a monthly fee at your bank for your chequing account? Are you paying for a land line in your home that you rarely use? You might find new ways that you can start cutting your costs now to save money.
4) Pay your bills on time. This may seem like a no brainer, but there’s no reason to waste money on finance charges or late fees. Simply being organized can save you a lot of money when it comes to your monthly bills. One late payment on a credit card can end up costing you hundreds in additional interest costs over time. Set up a schedule of monthly bills and their payment dates so you know when the payments are due.
5) Take stock of your non-cash assets to maximize their value. Do you have gift cards that you can use for shopping or entertainment, or that you may be able to sell for cash? Do you have rewards from credit cards that you can use to purchase gift cards? All of these assets can help you lower your monthly expenses. Knowing what you have can also prevent you from buying things you don’t need.
6) Pay down your credit card. If you have credit card debt, the interest costs you’re paying monthly are probably taking up a significant portion of your monthly budget. That money could be put towards more important things.
7) Look for better credit card deals. If you normally carry a balance, look for credit cards that come with a lower interest rate. The savings in annual interest costs could be substantial. If you have a rewards card, make sure you actually use the rewards that you’ve been accumulating by converting your points into, say, gift cards. Put those points to good use! Otherwise, why are you paying those annual fees?
8) Check your insurance coverage. Review your various policies (life, auto, home) and make sure you’re not paying for insurance you don’t need. It’s also worth making sure you have the coverage you need, and not just the bare minimum. This may also be a good time to shop around for better rates. An investment of time and effort can result in significant savings.
9) Don’t forget regular maintenance. This would include your vehicles, home and – most importantly – your physical health. The ongoing cost of regular maintenance is relatively low when compared to major repairs. An oil change for your vehicle is inexpensive compared to extensive engine work having to be done. Having a cavity filled is cheaper than having the tooth pulled or other dental work required in the future.
Life is unpredictable. Times of uncertainty – financial or otherwise – have been around forever and we manage to live through them. With a bit of forethought and preparation, you can minimize the impact and keep your financial wellness on track.
Vice President, Financial Education & Employer Services