How to budget in tough times

Editor's note: Read the latest on how the coronavirus is rattling the markets and what you can do to navigate it.

There’s no cure for COVID-19 yet, but that doesn’t mean there isn’t one for your finances. Even in these difficult times, there are steps you can take to protect yourself financially. No matter your situation, revising your budget is worth a shot. Though mundane, effective planning is one of the best ways to immunize your money, at least partially, and it can help you emerge from the crisis with a rewarding plan for the future.

Step 1: Tally up your income and expenses
The first step is to calculate the numbers, “because they’re probably different than they were before all of this,” says Liz Schieck, a certified financial planner (CFP) at the New School of Finance. This involves totalling your current income, including salary, government benefits like CERB, tax refunds and dividends, and calculating your expenses.

Initially, you may have made purchases out of fear because of the uncertainty created by the pandmemic. Evaluating your expenditures after the shock has subsided will paint a more accurate picture of how much you need to spend. This will show whether you have a shortfall or a surplus, and by how much. For many people the reality will be a shortfall – and knowing the magnitude of this is the start of developing a plan.

Your plan should include reviewing the services and products that you are using each month and employing budgeting apps to track your spending over time, advises CFP John Moakler, co-chair of the Membership Committee for Advocis Peel Halton, and president of Moakler Wealth Management. Not knowing that information “can lead to panic,” says Schieck.

Step 2: Slash bills
When you understand where your money is going, you can take steps to keep more of it. Cancel your gym membership and any recurring items that you cannot use in the short term because of social distancing, as well as any regular purchases of products that you have not been using. “It could be certain types of subscriptions that you forget about that are just going on your credit cards,” Schieck says.

Do not take austerity measures unless you must, she adds. “Truly, I don’t think its helpful for most people to be suspending their Netflix subscription and saving $15 a month if they’re at home all the time. Give yourself entertainment and some simple pleasures.”

However, be aware of discretionary expenditures that you will have to pay back with interest.

“Make sure you’re spending money on things you actually need versus things that you want,” says Moakler and, if it helps, “put away your credit cards.” Another tactic is to lower bills that can’t be eliminated. Since Moakler has been driving much less than usual, “I got my car insurance rate reduced,” he says. “Maybe you should revise your telecom, TV, or internet package. Shop around to see if you can get a good provider at a lower cost or go to your current one and renegotiate.”

Step 3: Ask for cheaper debt
If you have any types of debt, get it touch with your lenders to see if they will reduce your rates. “I just talked to a client whose credit card debt was cut from 19.99% to nine percent. Having that interest rate cut in half may reduce your minimum payment for the time being and your debt isn’t going to grow like it would otherwise,” Schieck says. However, she cautions against much advertised deferrals because interest keeps compounding, so you will have to pay back even more later.

Moakler also recommends consolidating debt in a way that reduces minimum payments and decreases debt burden.

If you need cash for unexpected bills and have a whole life PAR insurance policy “you may be able to borrow against it or tap into it, depending on how it’s structured,” says Moakler. In this scenario, your insurance policy essentially acts as an emergency fund.

Step 4: If you must, reach for your portfolio
But first, compare the impact of selling investments at a loss to the expense of taking on debt.

“I would rather see some people take a small hit on their investment losses, than be carrying credit card debt for five years,” Schieck says. On the other hand, “if you have a low interest line of credit and a good prognosis to paying that back, that’s probably preferable to selling investments.” She recommends accessing cash savings first. After cash, turn to fixed income. “Equities should be sold last”, says Moakler.

For those who need to reach into their portfolios to make ends meet, Schieck advises using a “controlled burn” strategy. If your shortfall is $500 per month, only move $500 from your portfolio to your chequing account each month. “That way, you don’t end up dipping into savings more than necessary,” she says, adding that you should start by withdrawing from a non-taxable TFSA, and avoid RRSP withdrawals because “you’re going to lose a heck of a lot of it because for most people, that tax burden is more than what they would incur in interest in the short term if they have a low-interest line of credit.”

Step 5: ‘Get outside your head’
“No one really knows their risk tolerance until they go through a period of loss with their portfolio,” says Schieck. After you make a long-term plan or budget, “it’s less about managing the money and more about managing your emotions. My best advice is to take a deep breath and don’t log in to look at your balance every day because seeing the fluctuations and the volatility can increase the stress.”