Since March 2020, Canada has been hit hard economically due to the COVID-19 pandemic. Like many countries around the world, we’ve faced business closures, lockdowns and higher than average unemployment. Though the federal and provincial governments have injected a significant amount of money to help businesses and individuals survive the economic impact of the pandemic, many people are still facing leaner times than normal.
While faced with ongoing financial hardships and no definitive sense of a return to normalcy, what should the average person take into consideration when planning their finances and taxes to best weather the storm? The best advice is to look ahead to both the short-term and the long-term to ensure they’re protected now, but they’re also keeping an eye on future income generation.
Here are four things to consider to keep your finances “recession-proof”, and look ahead to future growth:
- Focus on paying down high-cost debt. Start with credit card debt, as it often has the highest interest rates. This is important whether you still have a job or not. Those who have experienced job loss due to pandemic cutbacks may want to use a portion of their severance payout to pay off or reduce this debt to minimize interest expenses and their overall monthly budget. If possible, look to reducing other forms of debt with lower interest rates.
- Cut back on expenses. It is recommended that you limit your discretionary expenditures to 30% of your income. To keep this percentage as low as possible, take the time to examine your weekly and monthly budget and assess which expenses are true necessities. If you have moved to working remotely instead of commuting to work, you have likely already experienced a drop in weekly and monthly costs, including gas, food, and other day-to-day expenses. What else can you save on? If you don’t normally prepare and review a detailed budget, now is a good time to start.
- Shore up your emergency funds. Some of the money that you are saving should be used to increase your emergency reserve. Emergency expenditures are difficult to prepare for and can occur without warning. You may need to pay for home or auto repairs, provide funds to a family member in need, or pay for emergency dental or veterinary care. To avoid being caught off guard, it’s important to put aside some funds to cover these situations without impacting your ability to manage your regular expenses.
- Stay focused on the long-term when it comes to investments. Some share prices have decreased as many businesses have been faced with declining sales, imposed closures or restrictions, and less staff. Is this reason to sell? Generally, the answer is no. You may wish to review your investment portfolio with a trusted advisor to determine the best way to proceed. In some cases, it may even be a great time to increase your investment, while share prices are lower, to see a greater benefit in the future. Each situation is different, however. Your financial advisor will tailor their advice depending on your specific portfolio as well as your risk tolerance.
Looking Ahead: Canada’s Economic Recovery
The million-dollar question is, when can we expect to see a more steady incline in the economy? Recent months have been some of the most challenging, as infection rates soared in several provinces. However, with vaccine programs rolling out and continuing to expand, we are starting to see a light at the end of the tunnel. In the US, where a greater percentage of people are fully vaccinated, some areas have considerably loosened restrictions. In Canada, the economic recovery will take time and likely happen in phases. However, the start of 2021 was already more promising than expected, driven largely by a surge in the housing market.
Recently, the Vice President of the Business Development Bank of Canada had this to say about Canada’s projected economic recovery:
“Canada’s 2021 economic outlook is similar to that of other developed countries: After the largest economic contraction since 1945 (a dip we estimate at 5.5% of GDP), the economy should grow sufficiently to largely offset the losses of 2020.
Strong consumption and a rebound in exports will give the Canadian economy a boost. Bringing forward government investment projects should also provide a tailwind to Canadian economic growth. Conversely, the postponement of business investments and a slowdown in the housing market will limit the extent of the recovery.”
Predicting the end of the pandemic-induced economic conditions will be an ongoing challenge, with several factors still undetermined. The best thing individuals can do is keep in regular contact with their financial and tax advisors, to adjust strategies as needed.
Contact McCay Duff LLP in Ottawa for Skilled Financial Planning Guidance
An experienced financial specialist can provide much-needed guidance and strategy with respect to tax and financial planning in leaner times. If you have questions about maximizing savings and minimizing tax obligations during the ongoing economic situation, you should seek advice from a member of our team.
The financial specialists at McCay Duff LLP in Ottawa will review your particular circumstances and recommend a financial plan that will provide the most benefit to you now and in the future. To learn more about how we can assist you, please contact us online or by telephone at 613-236-2367 or toll-free at 1-800-267-6551.