How to financially navigate a crisis
Tips from the experts on getting the most out of your money during COVID-19
Canadians across the country are facing a difficult and unforeseen financial hurdles that have many worried. In fact, research by the Financial Consumer Agency of Canada back in 2018 stated that 48 per cent of Canadians said they had lost sleep because of financial worries — something that has only been exacerbated with layoffs, social-distancing and illness within the last few months.
As the world collectively frets about finances, three of the University of Waterloo’s experts in accounting and finance weigh in on what individuals can do with their personal finances, taxes and pensions to help them breathe easier and better navigate this crisis.
“When stress and emotions run high, it can lead to making poor financial decisions.” — Tracy Hilpert, CPA, Adjunct Lecturer, School of Accounting and Finance (SAF)
Hilpert, also Director of the SAF Financial Literacy in the Classroom initiative, stresses that before turning to expensive payday loans and high-interest credit cards, review your everyday spending to identify needs vs. wants. A want is something you enjoy and adds value to your life, but isn’t something you need to get by. Decide what “wants” you can forgo temporarily to reduce spending in the short term.
For needs, consider contacting your creditors and services providers to see what payment flexibility you can negotiate. Remember, these organizations are trying to manage as well, so payment forgiveness is not likely an option. Instead, ask about deferring your mortgage, loan, or bill payments temporarily — but make sure to understand the implications, including what it will cost and when the missed payments need to be repaid.
The tax filing deadline for individuals in Canada has been extended to June 1, 2020 and Andrew Bauer, Assistant Professor at the School of Accounting and Finance, highlights that you can delay payment on any taxes owed on your 2019 return until after August 31, 2020 (without interest or penalties).
Bauer, also the Canada Research Chair in Taxation, Governance and Risk breaks down the tax-related government support available as outlined in the COVID-19 Economic Response Plan. The support can provide individuals with cash in the short term and comes in three forms. First, $2,000 a month, for four months, in tax benefits are available to a broad range of individuals. Eligible individuals include those off from work without paid sick leave, those without Employment Insurance (EI) benefits, those that are parents and can’t work because they care for children off from school and those in quarantine.
Second, the Canada Emergency Student Benefit (CESB) provides eligible students and new graduates $1,250 a month, or $1,750 a month for eligible students with dependents or disabilities. This benefit is available from May to August 2020, with more details to be announced soon. Those repaying student loans also automatically have their loan repayments and interest suspended until September 30, 2020.
Third, additional amounts are available for low- and modest-income families through enhancements to the GST credit (up to $400-600) and Canada Child Benefit (up to $300 per child).
Pensions: Protect your life’s earnings
“Among the many significant impacts of the recent crisis is the effect on individual pensions.” — Neal Stoughton, Professor, School of Accounting and Finance
In recent decades there has been a gradual trend away from defined benefit plans toward defined contribution plans. Defined benefit plans are at the discretion of the employer and may be threatened by underfunding. By contrast, defined contribution plans are ‘fully funded’ by definition, but all the risk is essentially carried by the employee or retiree. Optimal asset allocation policies are usually governed by a rule whereby the mix between risky stocks and bonds shifts towards bonds as the employee approaches retirement.
Due to the market crash, the allocation to equities has likely declined already. Therefore, many employees may find they are “underweight” equities. Stoughton recommends not exacerbating this by selling equities and moving more funds into bonds or cash.
First, lessons of financial history show that there are long run mean reversion tendencies in the stock market. Risky investment opportunities are better now than before the crisis.
Second, long-term bonds are returning a nominal return near zero, which means that even small amounts of inflation may decimate real bond returns in the future. Especially if there are more than ten years to retirement, if the equity/bond percentage is below the classical 60/40 split, a reallocation towards stocks will probably pay off handsomely in the long run.
The University of Waterloo acknowledges that much of our work takes place on the traditional territory of the Neutral, Anishinaabeg and Haudenosaunee peoples. Our main campus is situated on the Haldimand Tract, the land granted to the Six Nations that includes six miles on each side of the Grand River. Our active work toward reconciliation takes place across our campuses through research, learning, teaching, and community building, and is co-ordinated within our Office of Indigenous Relations.