Debt & Frugality

As Didi says in the novel (Findependence Day), “There’s no point climbing the Tower of Wealth when you’re still mired in the basement of debt.” If you owe credit-card debt still charging an usurous 20% per annum, forget about building wealth: focus on eliminating that debt. And once done, focus on paying off your mortgage. As Theo says in the novel, “The foundation of financial independence is a paid-for house.”

Coping with the Costs of Covid-19

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By Carrie Hunter
Special to the Financial Independence Hub

Our world, as we’ve known it, has changed dramatically over the last few weeks. Likely, forever.

If you have children, and like me live in Alberta, you can now add homeschooling to your c.v. You and your spouse are now living and working in this same space 24/7 practising the soon-to-be-normalized cultural rite of social isolation.

When you do step outside, gratefully breathing in fresh air, looking up as a neighbour passes and takes a step back, yet still cheerfully waving, you’re reminded again of the new normal: social distancing.

Back in your home, you open up your laptop only to be inundated with Covid-19 news headlines, across every possible platform, and overwhelmed by the inconceivable number of people being felled by the novel coronavirus.

The Zombie Apocalypse

Unsurprisingly, global financial markets, reflecting the fear, anxiety and uncertainty of investors, are in free fall — the TSX and S&P were down 34% and 32% respectively the week of March 20th — cliff-diving off record highs of just a month ago. Reporting of these numbers is closely followed with economists’ dire predictions of a recession once the Covid-19 crisis subsides. It’s surreal. I can’t shake the feeling I’m an extra in a Zombie apocalypse movie. If only.

How do we cope as the once relatively reliable world we knew, just a few short weeks ago, continues to experience seismic shifts that shake and loosen the very foundation supporting our lives?

Keep calm, Carry on

We can only control what’s within our reach. This is my mantra; only now, I repeat it several times a day. Here are  some tips to help cope with day-to-day changes:

Emergency Fund

Practically speaking, ensure you have an emergency fund. Typically, you’re looking to sock away three to six months of living expenses for the “just in case” scenario. Don’t have it now? Don’t panic. Take a good hard look at your monthly expenses and incorporate this savings target into your budget. Anticipating an income tax refund? Earmark a portion of these dollars and deposit them into a high-interest savings account. Preferably one that’s CDIC insured.

Resist the temptation to save for your rainy day with extra monthly dollars. There’s rarely spare change at the end of the month; be intentional, add this line item to your budget. Even a few dollars to kickstart the account will make a difference in the long run.

Budgets

Do you have one? If not, this is a great time to put one together. Track ALL of your expenses for a month or two. Do you see any trends? Any obvious places you can trim expenses? Make it happen.

One of my favourite hacks is around groceries and meal planning. Each week, I shop in my freezer and pantry compiling a list of recipes for the week. Not only does it take the stress out of meal planning (and save money on takeout), but it limits trips to the grocery store.

Financial Support

More than one million Canadians have now applied for Employment Insurance. You may find yourself without work; caring for a loved one battling Covid-19 or staying home with your children due to school or daycare closures. The federal government will be offering financial support for 16 weeks, beginning in April (the online portal is scheduled to launch on April 6th) and payments will be retroactive to March 15th, through its COVID-19 Economic Response Plan.

Managing your portfolio performance

I review our portfolio on a daily basis. It’s not really something I should do, and given the performance of the last month, it may be a habit I soon break.

The last month has been startling; I’ve watched our collective portfolios steeply decline, briefly ascend only to decline again. It’s unbelievably tempting to hop off the rollercoaster, almost primal, really, sell what remains and seek shelter on the sidelines. Continue Reading…

Where are you parking your cash these days? GICs vs. High-interest savings accounts

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Cash is king during times of economic trouble. Working families need emergency savings to pay the bills in case of job loss or a reduction in wages. Retirees or near retirees need a cash cushion to avoid selling stocks at a loss. But should you park your cash in a high interest savings account or a GIC?

For a short time, not too long ago, we lived in the golden age of high interest savings. The competition was lively, as online banks and credit unions pushed interest rates well above 2 per cent (LBC Digital briefly paid 3.3 per cent).

Rising interest rates on savings deposits made GICs look less attractive. GICs paid the same rates or lower, yet savers had to lock-in their deposits for 1-5 years. Where did the liquidity premium go?

High Interest Savings Account rates

The situation quickly changed when the coronavirus pandemic forced central banks to take emergency action and cut interest rates. The Bank of Canada lowered its key interest rates by 50 basis points on two occasions. The ripple effect caused high interest savings account rates to plummet.

LBC Digital had already lowered its rate to 2.8 per cent – now it sits at a still respectable 2.25 per cent. Wealthsimple Cash had arguably the worst-timed launch when it came out with a 2.4 per cent interest rate for its chequing/savings account hybrid. That rate was quickly dropped to 1.9 per cent, and then lowered again to 1.4 per cent.

EQ Bank lowered the interest rate on its Savings Plus account to 2 per cent, while motusbank dropped its rate to 1.75 per cent. What a difference a month makes!

Here are the top high interest savings account rates today (March 25, 2020):

Bank Interest rate
LBC Digital 2.25%
Motive Financial 2.20%
Implicity Financial 2.10%
Outlook Financial 2.10%
EQ Bank 2.00%
Oaken Financial 2.00%

 

As always, savers need to look beyond the big banks to maximize the interest earned on their deposits. If inflation averages 2 per cent, then you need to earn at least 2 per cent on your savings to maintain purchasing power. Even still, at best you’re treading water.

Despite the recent drop in rates, a high interest savings account is still the best place to park your emergency savings. You never know when you’ll need to access cash for an unexpected bill, or to pay for your living expenses during a period of unemployment.

A high interest savings account is also a must-have for retirees and near-retirees to stash one year’s worth of spending – the first bucket in the three-bucket approach to retirement income planning.

What this current rate crisis has highlighted is the fact that high interest savings account rates are not guaranteed. Those who eschewed GICs to chase higher yielding savings accounts now find their savings account paying 0.50 – 1.00 per cent less than it was a month ago. Not ideal.

GIC rates

One of my clients recently alerted me to an email sent by Oaken Financial advertising an increase in GIC rates. Its one-year GIC now pays 2.5 per cent, which is a full 25 basis points more than the top-paying high interest savings account. Oaken’s five-year GIC now pays 2.95 per cent interest. It looks like the liquidity premium is back.

You’ll easily find one-year GIC rates paying at or above the best high interest savings account rate.

Bank Interest rate
Oaken Financial 2.50%
Canadian Tire Bank 2.50%
EQ Bank 2.40%
Wealth One Bank of Canada 2.40%
Peoples Trust 2.30%

 

Longer-term rates vary widely so be sure to shop around for promotions. Here are the top five-year GIC rates as of this writing:

Bank Interest rate
Oaken Financial 2.95%
Wealth One Bank of Canada 2.60%
Canadian Tire Bank 2.55%
EQ Bank 2.55%
Peoples Trust 2.55%

 

Readers should know that GICs are typically non-redeemable, so you should be absolutely certain that you won’t need the money when you lock it in for 1-5 years.

That means GICs are ill-suited for an emergency fund, but ideal for a goal with a specific time period.

Using High Interest Savings Accounts and GICs for Retirement Income

For retirees and near-retirees, GICs are best-suited for “bucket two” in your three-bucket approach to retirement income. Bucket two is where you build a GIC ladder with three to five years of annual retirement spending. Continue Reading…

Americans extremely worried about job security, finances and Retirement due to Coronavirus

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By Mike Brown

Special to the Financial Independence Hub

Due to COVID-19, 57% of adult Americans are worried about their job security, while 63% are concerned about both their retirement savings and ability to make monthly student loan payments. Plus, many other insights from LendEDU’s newest survey.

At the time of this writing, Johns Hopkins’ Coronavirus Resource Center has reported 353,692 cases of Coronavirus around the world and 15,430 deaths. In the United States, there have been 35,345, while the total number of deaths is 473 by most estimates.

Then there’s the economic fallout in the U.S. as the stock market has gone into a tailspin, and a recession, or worse, seems likely. With the nation necessarily self-quarantining itself, countless small businesses are shuddering their doors and laying people off.

In the wake of this global pandemic, LendEDU has surveyed 1,000 adult Americans to better gauge the micro-level economic impact that COVID-19 will have on our country.

We found that a substantial proportion of people are worried about their job security, retirement savings, mortgage or student loan payments, and taking on too much credit card debt.

Click here to jump to the full survey results

If you would like to see a specific breakdown of the data other than those provided (ex. state-by-state, gender, age), please email me at brown@lendedu.com.

Observations & Analysis: How is Coronavirus Impacting the Finances & Employment of Americans?

All data is based on a survey of 1,000 adult Americans commissioned by LendEDU and conducted by research firm Pollfish. The survey was conducted on March 18, 2020. For some questions, the answer percentages may not add up to 100% exactly due to rounding.

Job Security

We first asked respondents how Coronavirus has already impacted their job since the virus’ impacts started being felt by the U.S.

35% of adult Americans have been fortunate enough to see no changes to their job due to COVID-19, while a combined 24% have not lost their job, but have seen their hours either reduced or eliminated. Unfortunately, 6% of respondents have lost their job in the Coronavirus fallout.

But, just because the majority of respondents have kept their job in some manner does not mean they aren’t still concerned about losing it. This rings especially true amongst those who have seen hour reductions.

Amongst those that maintained their job in some manner, the majority, 57%, were still concerned about job security moving forward as the impact of Coronavirus widens.

67% of those who have seen reduced hours are worried about keeping their job, while 73% of respondents who had their hours completely cut but kept their job are concerned over job security.

Compare these numbers to the 48% of those who have seen no change in their job, but are still worried about their losing it.

No matter the position employees find themselves in as COVID-19 takes hold, it is clear that stressing over job security will almost be impossible to avoid during this time. Maintaining morale will be a challenge for employees, employers, and the economy as a whole.

General Finances

Before Coronavirus and its impacts hit home here in the U.S., how many Americans were living paycheck to paycheck?

No matter how the data is broken down, the majority of respondents were living paycheck to paycheck before COVID-19 became a large-scale issue in the U.S. This has been reported in other studies as well.

So, while the Coronavirus outbreak in the U.S. may not drastically change the financial lives of those who have seen no changes to their jobs, it could cause severe trouble for those who have seen reduced hours or lost their jobs completely.

For example, 70% of those who have seen their hours partially cut due to COVID-19 were already living paycheck to paycheck, while 82% who have lost their jobs because of the pandemic were doing the same.

Over the next few weeks or even months, these folks will be stretched thin like never before when it comes to their finances. This is why a plan to send Americans checks due to COVID-19 is being discussed in Washington D.C.

With financial woes forthcoming or already here for many Americans, some will be drawing from an emergency fund or savings account to cover expenses.

And when it came to the expenses that Coronavirus has brought on, whether it be toilet paper or T-bone steaks, we found that our respondents have spent an average of $335.65 on COVID-19-related expenses since the pandemic began to seriously impact the U.S.

When expenses run high, many consumers need to access debt, typically via credit card, to finance their purchases. We asked poll participants with at least one credit card if they will be taking on more credit card debt than they would like due to Coronavirus.

Retirement Savings

Coronavirus has already had a crippling impact on the stock market, and it’s likely to get worse. For older Americans especially, there’s a pervasive fear that retirement nest eggs might get completely decimated as a result.

38% of our respondents indicated they are currently saving for retirement through something like a 401(k), Roth IRA, or high-yield savings account. We asked these folks about their concerns over their retirement savings due to COVID-19.

Within each age breakdown, the majority of Americans indicated that they are worried about their retirement savings due to COVID-19 and the ramifications it will have on the market.

Not surprisingly, this is especially true for older Americans ages 55 and up who are in the retirement red zone. 67% of this cohort are concerned about their retirement nest eggs.

Monthly Finance Payments (Mortgages, Student Loans, & Credit Cards)

With financial worries widespread and budgets tightening, we wanted to ask a few questions related to common financial obligations that Americans have, like payments for student loans, credit cards, or a mortgage.

The following graphics are based on questions only asked to those respondents that stated they had a mortgage (35%), outstanding student loan debt (23%), and/or at least one open credit card account (63%).

Many respondents are quite concerned about meeting their monthly financial obligations, whether they be related to a mortgage, student loans, credit cards, or all three.

Most alarming was how those adult Americans that lost their jobs due to Coronavirus answered these few questions. 96% of this group was worried about meeting mortgage payments, 88% about student loan payments, and 93% about credit card payments.

Widespread delinquency or default would have severe implications on the economy at large. In an attempt to combat this, we have seen the Trump Administration waive further accruing interest on student loans and suspend all evictions and foreclosures until April for FHA-insured mortgages.

Investments

While we did touch on investments as they pertained to retirement savings earlier, we wanted to dedicate a section to more active, personal investments that consumers make through personal brokerage accounts.

To describe the stock market in the last couple of weeks as turbulent would be an understatement. There have been sharp rises and drops (mostly the latter), and trading has actually been halted a few times in recent weeks on both the New York Stock Exchange and Nasdaq. The 15-minute halts happen when an initial steep drop in the market triggers “circuit breakers” that shut down trading.

27% of our poll participants indicated that they were actively invested in the market through a personal brokerage account when COVID-19 started impacting the U.S.

We asked this group a couple of questions in regards to playing the market.

As expected, the vast majority of Americans who were making personal investments in the market when Coronavirus escalated got clobbered. 79% of respondents indicated they lost money, while just 8% made a profit.

And, how will these respondents invest moving forward as the pandemic continues to disrupt daily life?

As it turns out, the majority of investors plan on riding out the storm and holding steady on their stock plays. Meanwhile, 21% plan on buying more during this crisis, while 13% will be looking to dump shares.

Full Survey Results

Continue Reading…

7 ways retirees can weather the Coronavirus storm

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By David Field, CFP

Special to the Financial Independence Hub

If you’re a retiree or looking to retire soon, the COVID-19 Coronavirus is likely causing you anxiety about your finances: and I want to help relieve it.

As a financial planner, I’ve spent the last couple weeks providing guidance to my clients during this tumultuous time.

While I have no medical advice to offer (nor should I), nor do I have any way to predict the future, I’ve heard some very dangerous generic advice regarding people’s personal finances.

Simply advising people to “wait for the markets to go back up, and all will be well” ignores the fact that you may need income now, meaning you can’t just “wait it out.”

If you are retired, or looking to retire soon, here are seven actions you can take now to help reduce your financial anxiety.

1.) Create or maintain a cash reserve

Having cash easily accessible gives you options, especially in stressful times. There is a lot of noise out there in the financial media suggesting that “stocks are on sale right now,” and, as a result, you should allocate some of your resources to buying them.

If you are close to retiring (in the next year or so), or you are retired, I advise you to make sure you have enough cash to cover your living expenses for the next three years.

Then, and only then, if you have cash left over then you may want to take advantage of depressed stock prices.

2.) Sell your bonds, not your stocks

If you need to create cash, don’t sell your stocks: sell your government bonds. Assuming you have a balanced investment portfolio, you likely have government bonds somewhere in there.

With stocks decreasing, along with interest rates, those bonds have increased in value. This is why you have government bonds as part of your portfolio. (Be careful: don’t mistake government bonds for corporate bonds when selling your bonds.)

If you are in balanced mutual funds or ETFs, you may not be able to sell just your government bonds. If you sell your balanced mutual funds or ETFs to create your cash reserves, you’ll likely suffer some investment losses: but those losses should be much smaller than if you were to sell all-equity funds or ETFs.

Human behaviour causes us to want the safety of government bonds when we see our stocks decreasing in value: that means we’re selling stocks at a discount and buying government bonds at super-high prices. Try to avoid this behaviour, as it means your portfolio will get hurt on both sides.

3.) Postpone your retirement date, if you can

If you were planning on retiring soon, I recommend delaying implementing that decision by at least a few months. (The exception would be if you have a defined benefit pension that will provide most of your retirement income, and which gives you a defined retirement date.)

Once you start your retirement income, which is likely to come from many different sources, it can be difficult — or even near impossible — to make changes. With the COVID-19 virus changing the narrative every day, there’s a ton of uncertainty out there; meaning it is likely prudent to hold off retiring if you can.

In addition, if your employer needs to reduce its workforce in response to the current crisis, there may be some attractive options or financial offers that provide incentives for you to retire. If this happens, any kind of severance will provide an income cushion before you start your retirement income.

4.) Cut back spending

The math is very basic: If you reduce what you spend, then you will require less income from your investments.

While this is always the case, right now cutting back might be easier than ever. With vacation plans cancelled or postponed and no sports, music or performances to go to, it may be easier to save money than if you’ve tried in the past.

5.) Expecting a refund? File your 2019 tax return ASAP Continue Reading…

Do Americans want Free Health Care or complete Student Loan Forgiveness?

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A LendEDU study shows more Americans want free health care than student loan forgiveness. Free health care is a big plank for Democratic presidential candidate Bernie Sanders.

By Mike Brown

Special to the Financial Independence Hub

In Canada, the debate over health care isn’t nearly as fiery as the one that is going on within the confines of its southern neighbor, the United States. 

That is because Canadian citizens and permanent residents already have access to public health insurance that alleviates them from paying for health care services most of the time. 

But in the U.S., the debate rages on, especially with 2020 being a presidential election year. 

This election cycle is no different than any other one in recent memory because health care is once again a core issue amongst the candidates and constituents. Plans from both sides of the aisle range from maintaining the status quo to free universal health care. 

What is different about this year’s presidential election is the much greater emphasis that is being placed on the student loan debt crisis and the growing cost of higher education. 

Whereas before these joint-issues would have rarely been discussed at debates and rallies, they are now amongst the most discussed topics. 

And it’s easy to understand why; in the U.S., the total outstanding student loan debt figure is now roughly $1.61 trillion, which makes it the second largest class of consumer debt in the country behind mortgage debt. There are 44.5 million student loan borrowers and recent ones owe $28,565 in student loan debt. 

Student loan debt has gotten so out of hand in the U.S. in large part due to the ever-inflating cost of college tuition, which has outpaced the inflation rate by at least three times. Whereas the average cost of college in Canada for a Canadian citizen costs around $5,000 per year, it costs between $20,000 and $50,000 per year for an American attending college in the U.S. 

So, both health care and student loan debt plus the cost of higher education will be issues that weigh heavily on the minds of American voters in the 2020 presidential election. 

With this in mind, LendEDU, a personal finance company, conducted a survey of 1,000 Americans of voting age to gauge their preferences on the two topics. 

60% of Americans prefer free Universal Health Care to complete Student Loan Debt Forgiveness

LendEDU’s survey first asked respondents the following: “Would you rather have the United States’ $1.61 trillion in outstanding student loan debt be completely forgiven or have a free health care for all policy be implemented in the U.S.?”

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While 40% of poll participants opted for complete student loan forgiveness, the majority (60%) still wanted free universal health care instead.

In terms of cost, forgiving the nation’s student loan debt would cost somewhere around $1.61 trillion, while free universal health care would cost anywhere from $25 trillion to $36 trillion over 10 years. Further, while the average student loan debtor owes $28,565 in student loan debt, the average cost of health insurance was $18,764 for the average American family in 2017, with $5,714 of that coming from out of the pocket.  Continue Reading…