Uncertainty is unsettling and we’re getting boatloads of it right now. The relationship between Canada and the United States, combined with the delayed but still looming threat of tariffs are worrisome.
No one knows what impact this will have on personal income, inflation, and the stock market – and by extension our personal finances. If you haven’t done so, now’s the time to shore up your family finances.
Lower income and higher costs
Lower income isn’t just about job loss – it can result from lower commission income and bonuses, a salary freeze, and lower income for people running their own businesses. It’s a risk for many families.
Inflation, meanwhile, means your costs are rising. Whether tariffs will have an inflationary impact and how much is highly uncertain. The Bank of Canada believes that at a minimum, a one-time price increase is likely. And of course, we’ve just been through a period of inflation, and costs are already 18 per cent higher than they were in 2019.
The combination of these two factors means you risk building debt and sacrificing your long-term savings. This might be okay if the lower income/higher cost combination is modest and short-lived, but the impact can be long-lasting if you’re not careful.
Take a two-pronged approach to fortify your family’s cash flow: figure out where you can spend less and make sure you’ve got cash available.
Knowing what you can cut back on if you need to will give you a sense of control over your situation and can help to settle your anxiety. Itemize your discretionary spending – which things are you willing to cut back on?
Cutting the big-ticket costs will give you the most bang for your buck and vacations top the list. But other costs can really add up too: a couple of family outings a month and eating in a restaurant once a week can add $10,000 to your annual budget.
There are many things that families just cannot give up, and the most expensive is child care. Paying for daycare, after-school programs, and summer camp is unavoidable for working parents – and even if one parent loses their job, not all child care needs don’t disappear.
Make sure you have enough cash to meet these crucial expenses. This might mean you have to start setting money aside in a savings account now. Or maybe you can sell some of your riskier investments and hold the money in a safe investment that you can get to quickly, like a money market mutual fund.
Stock market volatility
Investing has felt really good over the past two years with the Canadian and U.S. stock markets rising substantially. Some investors have been lulled into complacency and are overinvested in stocks, especially U.S. stocks.
Ideally, you have set up your investments in a way that matches your time horizon and risk tolerance. Long-term money can handle stock market volatility but short- and medium-term money needs an element of safety and stability.
Your registered education savings plan (RESP) requires special consideration. When your kids were little, having a high allocation to the stock market was fine – your time horizon was long. But if you have a child who is now in their teens, postsecondary education isn’t so far away. By grade nine, you should be scaling back the risk in your RESP, increasing your allocation to safer investments such as bonds.
When your child is three years away – in grade 10 or 11 – you’ll want to start moving some of the money into cash-like investments like GICs, money market mutual funds, and high-interest savings exchange-traded funds. Having the money in something safe means you won’t be forced to sell investments to pay for tuition while we are in the middle of a steep market decline.
Lowering the stock exposure will also reduce your anxiety around losing some of the money you’ve worked so hard to save and invest over the years. Let’s say you have $80,000 in your child’s RESP: if we get a market correction of 20 per cent, and you are in an all-stock portfolio, you could lose $16,000 – that’s two years of tuition for some university programs. Are you okay with that or do you need to rejig your investments?
Being prepared and having a plan reduces worry and anxiety. So does sharing your concerns with someone, so make sure to talk it over with your partner or someone else you feel comfortable with. Your older kids might also be worried, so bring them into the conversation at a level that’s appropriate for them.
Anita Bruinsma is a Toronto-based financial coach and a parent of two teenage boys. You can find her at Clarity Personal Finance.
