Many Canadians working in oil related industries toady are feeling the results of the down-turn and are facing the prospect of reduced work hours, cutbacks in benefits, or worse yet, being laid off. Older oil patch workers are getting the golden handshake, but left wondering if they will be able to find suitable alternative work in this drastic period of economic downturn.
In all stages of life, people need good advice and investments strategies that will help them weather the financial and emotional storms during uncertain times. I believe people should plan to have sufficient rainy day savings to cover at least three months of living expenses. The grim reality is that unfortunately, in our consumer driven society this is not the reality for many Canadians. If you’re finding that you still have “month after the end of the money”, maybe it’s time to take a serious look at what you’re spending the money on.
Financial concerns: Without rainy day savings, when the unexpected happens, a lot of people usually cash in their RRSPs to pay the bills. This is especially undesirable, because as you dig into your retirement savings, you lose out on the potential future growth of any withdrawals, you lose contribution room that you never get back, plus you are hit with income tax on the amount you cashed in. It’s not hard to see that this is a loose, loose situation!
Today there are innovative banking options that can help people better manage their cash flow and allow them to pay down debt much faster without punitive penalties. Using these options to significantly reduce their debt and increase the equity in their homes, enables them to better weather these economic downturns. Another benefit of using extra cash to reduce their debt, is that interest costs are reduced as well. This can have the same impact to their bottom line as if they had used that money to earn an after-tax return equal to the rate being charged on their debt. Plus, as long as they still have available borrowing room, they can access that money again should they face a financial emergency. In most cases this is at much cheaper net cost than cashing in their retirement savings, especially their RRSPs.
Emotional concerns: During uncertain economic times, people need to know they have a backup plan in case their employment is interrupted. If cash is short, it’s very difficult to qualify for additional credit once laid off. In addition to a “stuff happens” fund, there are other things to consider. As many Canadians today work on a contract basis with no benefits, pension plans or job security, there’s a pressing need to build a safety net with adequate life, disability, critical illness and long term care coverage. Finally, having enough equity in their homes to have the ability to leverage that equity for cash flow if needed in an emergency.
If you have received a severance package it’s important that you treat it with care and not go on a spending spree. A financial advisor can help you with some tax reducing strategies so you aren’t hit with a nasty surprise when CCRA wants their share. Above all, don’t wait until you’re laid off, become sick or disabled. Developing a plan after the fact can be very difficult, and your options are limited. Spend the time to develop your plan while you’re still working so that you have options in place when times turn tough.
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