Sep 17, 2020
Reviewing your financial priorities in the face of crisis
In the early days of the COVD-19 pandemic, Cyrus Pourmoslemi began noticing a shift in the questions his clients were asking.
The Toronto-based TD financial advisor was accustomed to clients asking for advice about how to save towards longer-term goals, like paying for a first home or saving for retirement. But as the gravity of the public health emergency took hold, he noticed a change in his clients' priorities.
"The onset of the pandemic brought a behavioural shift towards establishing shorter term savings and ensuring customers had enough money to cover their basic expenses," Pourmoselmi said.
"People were navigating a loss or reduction of income without emergency savings. Unfortunately, many of us don't often think that something like this can happen to us, or we assume we'll be able to get back on our feet quickly. But a lot of the conversations I'm having with my clients now have shifted to the importance of having an emergency savings fund in place and how to do that."
While the COVID situation in Canada continues to evolve, Pourmoslemi's clients are once again asking about investing for the longer-term. He continues to recommend that clients take the time – even now – to create an emergency savings fund to help be prepared for a future crisis or unexpected financial event.
"Before the pandemic, you may have been putting money towards something like travel," he said.
"But now, chances are that you may not have used the money and it could be used instead towards helping you build an emergency savings fund."
Pourmoslemi suggests the following four tips to clients who are looking to review their financial priorities in the face of a crisis:
Focus on immediate needs by breaking down your cashflow into funds coming in and funds going out
Understanding your cashflow is always important, but after an unexpected financial event, knowing what's changed in terms of how much money is coming in and how much is going out is even more critical, says Pourmoslemi.
Pourmoslemi has been advising his clients to consider applying all incoming funds to immediate basic needs and leaving any long-term financial goals on the sidelines for the interim.
"As a first step I'd recommend breaking down your pay cheque or whatever cashflow is coming into your household to see how much of it has to be used for your needs and necessary expenditures and evaluate what is left over for wants or longer-term savings," he said.
"Using a personal cashflow calculator such as this one from TD can really help with this exercise, instead of spending hours putting together an updated budget with several categories for expenditures that could become overwhelming."
He adds that grouping all your necessities under one single 'bill' category, for example, to help determine what your cashflow is and then using any leftover money for savings or other purchases until your situation improves, can also help keep this process simple.
Pay attention to changing interest rates
Is it better to save any extra funds available once you've addressed your basic needs, or should you use those extra funds to pay off debt? It's a question many Canadians struggle with.
Pourmoslemi says it depends on a variety of factors including the interest rate environment, a client's goals, their debt load, and their current financial picture.
Sometimes, when clients have the opportunity to build up a small emergency fund by using the money they have left over after they have paid for their necessities, it can help to reduce their anxiety, Pourmoslemi said. It can also help encourage people to develop the habit of creating an emergency savings plan for emergencies, rather than relying on revolving credit, which may or may not be there when they need it.
Pourmoslemi typically advises clients that if they have any money available, they should first consider paying off any high-interest rate debt they may have. However, where the interest rate on the debt is not high, then Pourmoslemi may counsel clients that a better long-term strategy may be saving while also paying off the debt at the same time.
If clients find themselves struggling to save for a rainy day, Pourmoslemi said it's probably best to consider restructuring their debt to help improve their cash flow problems, while relying less on borrowing for their everyday needs.
"The advice that I would give people anytime, but especially during an emergency, is not to be afraid to talk to an advisor, and when you do, to ask questions to ensure you understand the advice being given," he said.
"Many people are still intimidated when it comes to speaking to an advisor and talking about money, and can be even more intimidated during a crisis, but a lot of good financial habits and strategies can come from breaking the ice and having that conversation. And it's free to book an appointment with an advisor at a TD branch."
Pourmoslemi said it's also helpful when his clients are open and honest with him about their finances because that allows him to provide them with the best advice that he can.
Establish a savings habit with a pre-authorized transfer service
Even during a crisis, establishing an emergency savings account can be done. To help slowly build up an emergency savings account, Pourmoslemi recommends people consider using a pre-authorized transfer service (PTS).
A PTS is a service where you set an amount of money that is automatically deducted from your account on a regular basis and deposited into a separate account so that you aren't tempted to spend it.
At TD, you can set up a PTS by calling us or going online and arranging to deduct any amount on a schedule that works for you. Pourmoslemi advises that the amount you should consider as your first savings goal is about three months' worth of your living expenses.
"What I tell clients who are setting up a PTS for the first time and are wondering how much to put aside each month, is to start with an amount that you know you can afford to put aside right away," he says.
"Do this for three or four months and then reassess. It's better to start small and see how it works and then adjust the amount to suit your needs and savings goals."
The most important thing, he adds, is simply creating the savings habit and then enjoying the satisfaction of watching your savings grow over time.
You can start saving with even smaller amounts each time you use your TD debit card
If a PTS doesn’t seem like a possible strategy for you right now, setting aside small amounts each time you use your debit card is another savings strategy you can try.
TD debit card holders can use the Simply Save program to help funnel money into their savings account. The program rounds up your debit card purchases by a minimum of fifty cents to a maximum of five dollars, as set by you, and places the extra rounded-up funds into a TD savings account you designate. Pourmoslemi says this method of saving, while modest, can be a good way to start an important habit.
"Any amount is a good start when it comes to saving," he said.
"When you start seeing your savings balance grow, it can help motivate you to want to save more, including finding ways to reduce your spending as well. Doing this can help you focus on working towards achieving any long-term financial goals you may have."
Pourmoslemi said that being realistic about what you can set aside is the most important first step when it comes to saving, and then adjusting the amount as your financial situation changes.