The year started out full of promise. I had just left my job as a university fundraiser to concentrate full-time on my online business, including this blog, freelance writing, and a growing fee-only financial planning service.
We caught the travel bug and had trips booked to Italy in April and a return to the U.K. in July.
The stock market continued to hum along, and my investments were up more than 20 percent in 2019.
My last net worth update had us closing in on the $1M mark. Life was good.
Then COVID-19 happened. The global pandemic put an end to travel plans, closed schools, halted economic activity, and caused stocks markets to tumble 30 percent in just one month. Something, something, the best laid plans …
Much has changed since I shared my 2020 financial goals. Suddenly, the thought of maxing out my RRSP seems so trivial and unimportant amid this COVID-19 crisis.
Yes, we’re sad that our travel plans were cancelled. More importantly, though, I’m grateful my family is healthy and for the most part unaffected by this crisis (aside from the mild inconvenience of home-schooling our children). I already work from home. And, although blog traffic and ad revenue is down roughly 20 percent, my freelance writing and financial planning business is still meeting expectations. Things could be a lot worse (and they are, for many).
With that said, I wanted to share how I’m managing my personal finances amid the COVID-19 crisis. You’ll see what’s changed from my 2020 financial goals, what I’m doing with our investments, and what I’m prioritizing so we can come out of this crisis with only minor setbacks to our long-term plans.
2020 Financial Goals – An Update
As I said, we had big plans for 2020. Here’s a rundown of our original financial goals for the year:
- Maintain current savings and spending rate (no negative financial impact from transition to entrepreneur)
- Max out my wife’s and my RRSP
- Catch up on TFSA contributions
- Max out RESPs
- Travel more
- Work less
- No new debt
I’ll have more to say about our savings and spending rate later.
As for RRSPs, my wife made a $9,000 contribution before the RRSP deadline to max out her 2019 deduction limit. I had already maxed out my 2019 deduction limit and now I’m just waiting for confirmation of my 2020 deduction limit (likely ~$3,600) before I make that contribution.
We’ll call that mission accomplished.
I planned to contribution $1,000 per month to my TFSA as part of my goal to slowly catch-up on unused TFSA contribution room. So far, so good. I’ve made three $1,000 contributions this year, with another nine contributions scheduled for the remainder of the year.
Oh, and I moved my RRSP and TFSA accounts from TD Direct Investing to Wealthsimple Trade to take advantage of zero-commission trading.
This one is automatic. We have $416.66 taken from our chequing account each month to go into our kids’ RESP account. We treat it like a bill payment and plan to keep contributing this amount until the kids are ready to enrol in post-secondary.
Insert crying emoji
I’ve worked much less since leaving my day job to focus on my online business. That may sound obvious, but it took some time to adjust to a new normal and to stop ‘working’ in the evening and on weekends.
Hopefully I’m not working too much less if business slows down further during this pandemic.
No new debt
We have not taken on any new debt this year. Thankfully, we have a solid emergency fund (in our business account) that can cover at least six months of living expenses. And, thankfully, business income has been strong enough that we haven’t had to dip into the emergency funds.
2020 Financial Reality – What’s Changed?
Ok, so for the most part we’re on track to meet our financial goals. But there have been some changes in our financial reality, some due to COVID-19, and some decisions we’ve made on our own.
My pension decision
The biggest change to our personal finances comes from my pension decision – to take the lump sum (commuted value) rather than deferring the pension until I’m 65. Here’s what that means:
- I’ll receive $134,000 to go into a locked-in retirement account (LIRA)
- The remaining $156,000 will be sent via cheque (minus taxes withheld) and must be declared as income this year
What will I do with the LIRA? I plan to invest the entire amount in Vanguard’s all-equity ETF (VEQT). Note, I had to open a self-directed investing account with TD Direct Investing because Wealthsimple Trade does not yet support LIRAs.
I’m hoping the funds arrive soon. While stocks fell 30+ percent, they’ve since recovered somewhat (as of this writing) and the TSX and S&P 500 are now down approximately 20 percent for the year. Nobody knows where markets are headed in the short-term, but I’m eager to take advantage of discounted prices and put my money to work.
Unexpected income source
My wife and I had originally planned to pay ourselves dividends from our business this year. This would give us a year to determine the revenue potential from putting full-time hours into my online activities. We’d also pay extremely low personal taxes. This was the idea behind the goal of maintaining our current spending and savings rates.
The downside of this approach is that by not taking a salary we wouldn’t earn any new RRSP contribution room or pay into the Canada Pension Plan. Another drawback is that dividends aren’t deductible as a business expenses and so while our personal taxes would be lower, we’d pay more taxes within the business.
My thinking changed when I had the opportunity to take the commuted value of my pension. Normally it’s not wise to take a fully taxable cheque for $156,000 when you have other earned income and no RRSP contribution room. So what did I do?
Instead of my wife and I taking dividends from our business to fund our lifestyle, we’re going to limit our withdrawals to what we’ve taken out from January to March and rely instead on the $156,000 (minus taxes) to fund our living expenses and savings goals this year.
That amount is more than what we planned to withdraw from our business, so it’s given us an opportunity to fund additional goals. It also allows us to leave much more money inside the business, which makes my accountant happy.
Accelerate TFSA contributions
I have about $30,000 in unused TFSA contribution room and so it will take me several years of saving $1,000 per month to fully maximize this account. However, I plan to use my pension income to accelerate these contributions and fully top-up my TFSA this year.
By investing the full amount now, I can take advantage of the recent market decline and put more money to work, earlier. Of course there’s a risk that markets fall further from here, but that’s a chance I’m willing to take as a long-term investor.
We’ll even have a bit left over to start on my wife’s TFSA contributions
Shore up our cash savings
An unexpected benefit of cancelling our travel plans is that we’ve received thousands of dollars in refunds that we had prepaid for our trip to Italy. Our flights were booked through Aeroplan, and so our miles were refunded and we expect to receive a full refund for the fees and taxes paid (about $1,200).
We received full refunds for the Airbnbs we had booked in Rome, Florence, and Venice. All we’re waiting on is about $400 in train tickets where we may have to settle for a credit.
And, if our summer travel is indeed cancelled, that’ll mean thousands more in refunds. We’ll sock away this money to shore up our cash savings and prepare for any unexpected shocks to our finances.
A word about debt
It’s clear that our finances are in good shape to withstand a drop in income. We’re also buoyed by two unexpected cash infusions: our travel refunds, plus the additional cash from commuted value of my pension.
We’ve also benefited from the Bank of Canada’s emergency interest rate cuts. The interest rate on our variable rate mortgage now sits at just 1.45 percent. More of our monthly payments are going towards principal rather than interest. I’m in no hurry to pay off this debt.
Related: Why don’t I pay off my mortgage?
The interest rate on our paid-off home equity line of credit is just 3.05 percent. I’m normally opposed to leveraged investing, but with rates so low, our finances in order, and stocks on sale, I’m wondering if now is a good time to borrow to invest?
I’ll let that idea ruminate for the time being. For now, I’ll just say that if markets already bottomed out on March 23 then I’ll be less inclined to use leverage. But if the past week’s recovery was indeed a dead cat bounce then I’ll consider borrowing to invest.
I know there’s much more important things going on in the world today than how a personal finance blogger is managing his finances. First and foremost, I hope you are all safe and healthy – especially those of you working on the front lines. I hope those who’ve been laid off or had their hours reduced get the support they need from the federal emergency response benefits.
I also hope that by sharing how I’m managing my finances and updating my goals amid the COVID-19 crisis you’ll take something away that you can apply to your own situation. This impacts everyone – and no one is coming out of this completely unscathed.
Let’s share and help each other through these times.