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Personal Finance Canada: How to Gain Financial Freedom

Running into money trouble is a lot less scary if you know how to recover from it.

Financial security allows people to focus on achieving their dreams to build a fulfilling life. Without it, feelings can turn towards anxiety and despair, especially if the insecurity stems from a serious financial loss.

The loss of income or a large sum of money can happen quickly and without warning. Losing a job, suffering from illness or failing health or going through a divorce are life changes that can devastate your finances. But even a regrettable investment decision can lead to a sizeable financial setback. Depending on how you respond, however, such a loss can be temporary – and perhaps a valuable learning experience.

Knowing that it can happen to anyone means that it’s sensible to think about how you would be affected by a similar situation. Would you be able to handle it financially? For how long? How would you recover from the loss and move forward?

Focus on solutions

Among the more positive reactions to a significant financial challenge is to stay calm and avoid making any raw emotional decisions. Instead, this is a time to seek the advice of a trusted professional. Your advisor can help you assess the impact that the loss might have on your short-term and long-term goals and offer some constructive ideas to help you get back on the road to recovery.

Regardless of the circumstances, there’s bound to be a fitting solution, even if adjusting to a new financial picture might require a higher level of discipline and resolve. If the money woes look as if they will continue for some time, changes to your lifestyle could be at hand – changes that go beyond cutting back a few dollars here and there.

Inspect your expenses

After determining the scope of the problem, a breakdown of your budget will be in order. When you stop to compare your income with discretionary (non-essential) costs and compulsory bill and credit payments, you may discover that the road ahead won’t be as rough as you thought.

Begin by looking at your largest monthly expenses and how they can be trimmed or eliminated entirely. You can immediately stop spending on things you don’t need, which might be costing you enough money to prevent a quick recovery. One example is the cost of owning, operating and insuring a car or two, especially during the pandemic, when many people are driving less than usual. If commuting to work is no longer part of the daily routine and it’s possible to use transit or other reliable means to get around for essentials, the savings could be enormous.

You can also filter through the little bills you may not often think about, but which could be adding up to a surprising amount of money each month. This could be the time to finally cut the telephone land line or cable TV connection and scale back online subscriptions, such as streaming services and shopping sites, which are nice to have but not essential. The amount you may be paying for a variety of small items, especially in regular monthly charges that are debited directly from your account, could be redirected towards getting your finances back on track.

Modifying a mortgage

After a more severe financial loss, you may decide that continuing to live in your current home will become unaffordable. Although potential costs should be considered, there could be an upside to downsizing. You could use any extra profit or savings you reap from selling and moving to help reduce your debt and make up some ground on your credit responsibilities.

If it’s a matter of staying put and making your mortgage payments, adopting a less aggressive payment schedule or negotiating a reduction in the payment amount with your provider may suffice for the time being. Most lenders allow clients to renew their mortgage early. While it may result in a prepayment penalty, often the penalty can be blended into a new mortgage – allowing you to take advantage of current low interest rates to lower your monthly costs without paying the penalty up front. Alternatively, extending the amortization period may help you cover the costs of your mortgage more gradually.

In any purchase of new housing, be sure to explore the benefits of mortgage protection insurance that can be activated in challenging times.

Caring for a wounded portfolio

Stock market performance in 2020 surprised even the most seasoned experts. A dramatic slide in stock values in the spring soon transformed into one of the most impressive rebounds in history. By the end of the year, the markets had made a full recovery, even hitting record highs along the way.

This experience underscores how important it is to stay invested. Consider the plight of an investor who, at the first sign of trouble in the early phase of the pandemic, fled the markets for the safety of the sidelines, or worse, sold their assets while markets tumbled. These actions would have effectively doused any possibility of benefiting from the strong resurgence that followed. Re-entering the markets as they began to rise became a costly proposition because stock values quickly moved beyond their low levels.

Rather than being on the downside of market fluctuations, diversifying your portfolio, even making small adjustments, such as rebalancing funds and assets with more conservative investment products, can protect you against future volatility. Guaranteed investments, such as segregated fund contracts, are another option that offers continued exposure to the markets while limiting risk. Dollar-cost averaging can also work in your favour by investing smaller amounts at regular intervals that can help average out the costs of growing investments over time.

Borrow wisely

When the need for additional funds exceeds what you can access from earnings and savings, it might be tempting to borrow money to compensate for a loss. However, this approach is generally far from ideal. Adding debt on top of debt is a risky way to try and work your way out of it. Credit cards, for example, can offer a lifeline, but only if you are able to pay them off quickly. If this isn’t possible, servicing high-interest debt over months or years can end up worsening the problem.

If you need quick access to funds, borrow wisely while doing what it takes to avoid dipping into any taxable investments, such as a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF). Withdrawing funds from a Tax-Free Savings Account (TFSA) or any emergency savings you have on hand will effectively protect you from paying fees, penalties and taxes that can easily cut into the progress you’ve made to dig yourself out of a financial hole.

If high-interest credit debt is the issue, talk to your lender rather than risk a drop in your credit rating by missing even a single payment. Ask about lowering the interest rate or how you might adopt a more flexible schedule that allows you to defer a payment or two. In more complex situations, creating a debt consolidation plan that enables you to pay a set amount on a single account with a lower interest rate may be the answer. Your advisor can explain the advantages of various credit and loan options that suit your circumstances.

Get back to basics and keep moving forward

Adopting sweeping measures to improve your finances won’t be easy, but they could be critical to reclaiming control of your future. As the situation improves, you can set new goals and build safeguards against the economic effects of any similar situations that emerge down the road.

Once you’ve reduced your expenses to combat a loss, it will be easier to continue doing so after the matter has passed. And while paying down debt is an effective way to help improve your financial position, saving more may be a preference. Making the effort to set aside some emergency funds in a separate account can also add some welcome peace of mind.

As you move further away from the problem, be sure to share updates on your progress with your advisor, who can continue to help you understand the benefits and consequences of the options at each new stage of your recovery. Most importantly, don’t despair. Most losses don’t last forever. With some professional guidance and a solid plan, your position could turn around relatively quickly. You can then chalk up the experience as an unfortunate setback to learn and move forward from.

A final tip

Don’t overlook the benefits and security of owning various types of insurance. Once you’ve stabilized your finances and take a longer-term view of the future for you and those who depend on you, re-evaluate your insurance coverage status and needs. Even a basic level of insurance protection can help guard against the hardships that can come with a financial loss. Speak to your advisor to learn more about the array of available and affordable insurance coverage options, including health, dental, critical illness, disability and life. This insurance checklist can help you get organized by focusing on some key questions.


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