Author:  Adam McHenry, CFA

Sheltering in place has been tough; not being able to meet with family or friends, nor being able to step outside your home for a break required us all to adjust. There were some positives to the lockdown, though, including finishing off home projects you’ve been putting off. Another “to-do” that you might want to think about is whether there have been changes in priorities that could impact your financial affairs.

If you haven’t addressed this yet while spending more time at “home base,” here are some recommendations which I hope will inspire you to get organized, feel empowered and emerge confident in your financial future.

Review your spending, saving and cash on hand

The recent pandemic and the economic shock that ensued certainly made clear that having an emergency cash on reserve for times like this is highly important. The idea behind an emergency fund is to see you through a period of uncertainty concerning your employment or health, without the need to run up debt or tap into your retirement savings.

For the size of your emergency fund, recommendations vary from three months to a year of expenses. The amount will vary based on your specific circumstances; however, at a bare minimum, you should store away three months of spending for a “rainy day,” like the type of events we’ve seen during COVID.

Building an emergency fund and creating sustainable wealth requires that you calculate and understand the most material parts of your cash flow situation. Here is an example of how to make this calculation, along with some comments to make the process easier.

An easy way to calculate your cash flow

Annual estimateCash flow exampleAdam’s comment
Income $$100,000T4 income on your last tax return will do, or you can calculate annual income based on your most recent pay stub
Taxes $$23,708*Use income tax calculator to calculate your expected taxes based on your income estimate
Savings $$12,000You might save a monthly amount, say, of $1,000 per month, or instead do a lump sum for $12,000 at the RRSP deadline each year
Spending $$64,292(Assuming you are not hiding money under your mattress), this figure is the result after deducting your taxes and savings from your annual income

* This tax figure is for an Ontario resident in the 2020 tax year

Revisit your investment plan

You are likely contributing the savings you are setting aside to a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA). These are tax-efficient investment accounts and a good place to grow your savings.

If the recent downturn in the stock market had you up all night, then it’s likely that your investment plan does not fit your expectations. Your investment plan should be based on two key, interrelated factors: your ability to tolerate risk (facts about you, such as your age) and your willingness to tolerate risk (feelings you have, such as whether investment risk makes you anxious).

If you set your investment plan up correctly, then even in challenging markets like we had recently, being clearer on your expectations should help quell any anxiety.

Protect your family through an insurance and estate plan

Protecting your family from the COVID-19 virus has been a priority for many parents and families recently. Purchasing face masks, hand sanitizer and disinfecting wipes are some of the investments many have made to combat the virus. Over the long term, life insurance coverage is something that can protect your family as well.

Although we don’t like to ponder our mortality, the recent pandemic has obviously made us hyper-aware of the fragility of life. Given the current situation, today, many insurance companies are providing life insurance coverage faster and easier than ever before. Since having a paramedical nurse come to your house to take your blood, etc. is no longer acceptable in the time of COVID, you can now acquire up to $2 million in life insurance coverage simply through a telephone review with a nurse.

Are your documents in order and easy to find?

Just as you would organize the garage or kitchen cupboard, make sure you sort and store your financial records (i.e., will, insurance policies, investment statement and online passwords) in a safe place. Why is this important? If you happen to pass away, your loved ones and executors will need to be able to retrieve these documents to deal with your estate efficiently.

If you have been avoiding completing or updating your will and power of attorney, now is always the right time to engage a lawyer to help you complete those critically important documents. A will and power of attorney don’t just protect and organize your financial assets; they also ensure that any dependents you have (your children) go to the care givers you designate.

Also, make sure to review the beneficiaries on your registered investment accounts (RRSP, TFSA, etc.) to ensure that you have designated a specified living beneficiary. Updating this information could save your estate and loved ones thousands of dollars in unnecessary tax.

Take the next steps – a financial advisor can help

Not comfortable cleaning out your own financial closet? Don’t have an investment plan in place? Now’s a good time to get one! Then, consider meeting with a financial professional who can establish a financial and investment plan so that you will know what to expect.

At my investment practice, we create financial and investment plans for each of our clients. As a result, our clients understand what they can expect from their wealth in challenging times and the potential risks to their plans. In the end, our clients are more confident in their future and walk away with the “peace of mind” of knowing they can weather future events like COVID-19.

To learn more about how you can become more confident and comfortable in your financial future, contact a financial advisor.

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The above article is reprinted from the newsletter Business Matters with the permission of CPA Canada.

BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

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