Author: Jesse Richards, CDFA
Financial well-being is not just living on a budget, it's about being prepared for the situations that can and will arise throughout our lives. In most instances, extraordinary expenses occur suddenly, such as loss of employment, home repairs, or vehicle repairs. Other situation can be foreseen and planed for, like retirement. How do we effectively provide for these situations so we can weather the storms of life?
A budget is a tool to understand the income and expenses in one’s life and to help an individual make choices regarding the use of their resources. During times of financial stress, such as the current COVID-19 pandemic, it is important to understand where you are financially. Our individual budgets have all changed, but not for the same reasons. These changes may have had a positive or negative effect on your financial position. For example, being able to work from home would have a positive financial effect. Your income is still the same, but not having to pay for fuel to commute, parking, fast food lunches, and your daily Starbucks results in saved money. So, what do you do with the extra money? What if the effects of the pandemic is negative? What can you do if there is a shortage in income?
Saying 'no' to large expenditures tends to be easier than the small ones. Small expenses can easily nickel and dime you out of a couple hundred dollars a month if you are not careful. A good starting point to reducing expenses is to ask, "What small, regular purchases do I make which I can do without?" From a day-to-day standpoint it may seem immaterial, however, it will make a significant difference over time.
Saving a few hundred dollars may not be enough. Fortunately, many credit and financing institutions have COVID relief policies now in place. Credit card companies are allowing payment deferrals or temporary interest relief. You would have to contact your company directly to see what they are offering. Deferred payments are also available for mortgages. Make sure to ask about the post COVID payment terms, so you can prepare.
Consumer proposals or consolidations are another option. It can greatly reduce your monthly expenses. This is not to be taken lightly, entering a consumer proposal can drastically impact your credit rating.
What if the COVID lockdown has had a positive impact? Paying off credit cards and
maintaining a zero monthly balance or topping up retirement or education funds, are wise decisions. Many mortgages have extra payment policies. You may be able to make double payments or a one-time annual lump sum payment. Though this may not make a noticeable change in the principle amount owing, it can save you much more in future interest payments and shorten the time paying off your home.
Regardless of how COVID-19 has affected you, it is wise to have an emergency fund. This can be accomplished by simply putting a few dollars in a jar each time you are paid. A goal to reach is to have at least one-month expenses set aside. Then as need arises you can draw from the fund instead of going into debt for the unforeseen expenses.
Financial well-being comes bit by bit, not by windfalls.