How I’m Managing My Finances Amid The COVID-19 Crisis
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.
RRSPs
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.
TFSAs
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.
RESPs
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.
Travel
Insert crying emoji
Work less
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.
Final thoughts
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.
Thanks for your post. There are more serious things happening but for those of us retired and using our life savings to live, thoughts on finances are welcomed.
I wonder why you don’t max your TFSAs now when you are in a lower tax bracket? You will likely find your tax bill when you convert to a RRIF to be as high or higher than the years you contributed. Gains in TFSA can be significant.
Hi Pursuit, thanks. My focus for several years was to catch up on RRSP contributions. My income was higher when I worked at the University then it will be in future years so it made more sense to prioritize those contributions.
I had maxed out my TFSA from 2009-11, but then emptied the account in 2011 to top-up the downpayment on our house. Life happened and I was not able to re-contribute until 2016, with a large amount of unused room that I’ve been slowly catching up on.
My wife’s RRSP is now fully maxed out, and since she receives dividends from our business she will not earn any new RRSP contribution room. We’ll get to work on her TFSA next.
Once my RRSP is maxed out with a ~$3,600 contribution in the coming weeks, I’ll also no longer have any RRSP room. That’s why I’ve decided to accelerate my TFSA contributions, using the income I’ll receive from my pension this year.
Going forward, I’ll max out my TFSA at $6k per year and then we’ll focus on catching up on my wife’s TFSA room.
I’m not concerned with a high tax bill in retirement as our income will be considerably lower than it is today, and my RRSP will only be in the low-to-mid six figures. I’ve done the projections and we’ll have a nice blend of income from RRSPs, TFSAs, small business dividends, and CPP & OAS in retirement.
Robb,
Have faith, you’ll survive!
During 2008-9, my portfolio was in the tank. But, since I had spread out my investments in ETFs and balanced funds, I decided to ride it out. Of course, now I’m back where I was then. But, I will adjust to conservative portfolio. Hopefully ride this storm too. The Ander’s chart is a pretty good guide.
Hi Sam, thanks – I agree. We’ll get through this. This market crash happened so quickly (-30% in one month!) that I’m hopeful the eventual recovery will also be swift once this is behind us.
That said, I’m viewing market declines through a different lens than many retirees who rely on (or soon will rely on) their portfolio for income. I’m a net saver for the next 15-20 years. I can buy more shares for my money when stocks fall in price.
Retirees or near-retirees don’t have that same long-term view, which is why it’s important to build in a safety net of cash and GICs to avoid selling stocks at a loss.
Several years ago we had pretty large lump sum payments from selling an incorporated business. We incurred a large tax bill as it counted as income, similar to your $156K. Our total income that year was way more than any previous year.
What has helped us recoup most of this tax is the Alternate Minimum Tax (AMT) whereby we had 7 years in which this AMT amount gradually reduced taxes we owed. As we were now retired and had no earned income, we sold RRSP funds late in the year, had the taxes withheld but then got them refunded in the Spring. We bought the same mutual funds as TFSA’s so total assets were the same.
You might like to calculate if taking salary instead of dividends for a few years would be beneficial for you. This would also let you continue to contribute to CPP. The CRA form is T691.
Hi Roger, thank you for sharing your experience.
I didn’t get into the details in this post, but yes I do plan for both my wife and I to take a salary in future years – likely up to the yearly maximum pensionable earnings. This will allow us to contribute the max to CPP and also earn some RRSP contribution room.
I decided to take dividends this year for the sole reason that it was easier – I had streamed dividends to my wife for several years – and I wanted to make sure our business revenues were solid.
An unexpected benefit of this approach has allowed me to take the commuted value of my pension as income this year without too much of a painful consequence, and also leave much more income inside the business so we can start 2021 with a very solid baseline.
Hello.
Just a question about your travel refunds. We have a trip booked to France, Amsterdam and other European countries early June. We have mixed opinions about how to go about cancelling and getting our money back. The airfare was a splurge – business – so that is the biggest outlay. We did get insurance for it, but of course the trip cancellation option has restrictions. One is government cautioning about travel. Should we wait until closer to departure to see if the Canadian govt is still cautioning in mid-May or cancel now and lose the non-refundable part of the flight? We’ve also prepaid trains through Europe (non-refundable) and hotels (penalty is 50% each for cancellation). And advice welcome.
Thx
Hi Wendie, it’s an interesting dilemma. If you cancel now, you may be entitled to a refund given what is happening around the globe. For instance, Air Canada’s website says:
“If you made a flight booking before April 15th, 2020, and you want to cancel it, you can do so with no cancellation fee. You will receive full credit, which you can use towards future travel. This credit is valid for travel before April 30th, 2021.”
So I’d check which airline(s) you booked with and find out their COVID-19 related cancellation policies.
The hotels and trains may also have modified their cancellation policies amid this crisis.
All of that said, your best bet may be to contact your travel insurance provider – specifically if you have trip cancellation insurance – and ask for their guidance. I know trip cancellation and trip interruption insurance can be activated when the government raises its travel advisory to level 3.
What I don’t know is how long that’s in effect. For example, right now Travel Canada has a blanket “avoid non-essential travel” advisory until further notice. Is that enough for your insurance to kick-in and cover any losses from cancelling now? That’s a question for your insurance provider.
Thanks for your response Robb.
We go between refund vs credit for future travel. We are retirees and have some house expenses we could cover with a refund, and of course this pandemic has hit our pensions hard.
I will get in touch with our insurance via travel agent, but he’s been so swamped just trying to get people home I feel a bit shallow asking about refunds. There is no panic for us so I guess we’ll give it some time.
I wonder if this is affecting your pension payout? https://www.osfi-bsif.gc.ca/Eng/pp-rr/ppa-rra/Pages/Pen20200327_let.aspx Sounds like everything is temporarily frozen despite paperwork dates, etc.
Hi Christie, I saw that today. Very interesting. It looks like this applies to federally regulated pensions, whereas my UAPP plan is registered under the Employment Pension Plans Act of Alberta. Hopefully the transfer goes ahead, otherwise I’ll be writing another financial update soon :/
Hi Robb,
My daughter had booked a flight to Hawaii from Toronto last December through Expediafortd and was supposed to travel end of next month. She filled out a cancellation request for on Expediafortd.com and I got a reply today from Expediafortd that Delta Airline is offering a a travel credit valid until December 31st,2020. We would like to get a refund as I paid with my my TD Visa First Class Travel card. Any suggestions on how to approach TD Visa for a full refund?
Hi Manish, my understanding is that airlines are only offering travel credits for cancellations. Perhaps TD’s trip cancellation insurance could kick-in, but I can’t say for sure. Worth a call to TD to inquire about trip cancellation.
Thanks Robb for your reply.Willcall TD Visa
Hey Robb, I too am seriously considering using leverage to invest and take advantage of the discounted stock prices. I’m only able to do this because fortunately, like you and your wife, my hubby and I are also blessed to be in a good financial position with a relatively small amount of debt and enough in savings to comfortably cover up to 12 months of our living expenses. We have a horizon of 20 – 25 years before retirement, so enough time for the investments to grow wonderfully. One of my hesitations is the tax implication because we’d have to do it in a non-registered account because both our RRSPs and TFSAs are maxed out. I have do doubt that the bounce back (whether it takes several months or several years) will be spectacular and I really don’t want to miss out on that. I’ve already crunched the numbers and know financially it would make sense especially at the current interest rates. My other hesitation lies in the fact that financial decisions are part technical and part emotional – I’m having a hard time (emotionally) wrapping my head around using leverage to invest. Would love to get your take on this.
Hi Caron, that’s part of my struggle as well. One benefit to using leverage to invest in a non-registered account is that the interest would be tax deductible (it’s not if you were to borrow to invest in a tax-sheltered account).
Ben Felix recently shared some research that suggested young investors would be wise to use leverage to invest – arguing that a young 100% equity investor is still under-exposed to equities (due to having a smaller portfolio). To improve that ‘time diversification’, a young investor could use leverage to increase their equity exposure and increase expected long term performance.
Of course, that’s assuming a young investor can handle volatility in their leveraged portfolio. This is an idea that may sound good in theory, but could prove to be a disaster in practice.
Hi Robb, I wonder about your mortgage. As it is variable, have your payments dropped or have you maintained the same payment to take advantage and put some “pain free” extra principle payments on your mortgage? In 2008/2009 that is how I made a big jump on my mortgage for no pain was to increase my payments back up to the previous payment to cover the drop due to decreasing interest rates.
I have three mortgage payments left and have never been so happy to have that off my books. I am not worried about my job but to have very little in the way of fixed expenses once this is gone I think I’ll feel less stressed as we go through the next few months.
Hi Pam, my mortgage payments don’t fluctuate when interest rates rise or fall. That means more money is going to principal now, which reduces the amortization of my mortgage. I’ll admit I like the idea of paying off my mortgage faster, but I just can’t bring myself to be super aggressive with it since my rate is so low (1.45%).
Three payments left – that must feel amazing to be mortgage-free so soon. Congrats!
That’s great. The way my variable mortgage was set up the payments dropped so I had to proactively call the bank to move them back up. So I was decreasing the amortization without feeling like I was actually paying it off more aggressively. But I hear you on the low interest rates. With only so much money to spread around you have to make choices and there might be better opportunities for the money.
Your variable rate is so sexy, haha!
I still have cash and I’m thinking to slowing put money into the market and leaving myself enough cash for a year of expenses… then if markets are still down maybe consider leverage though I prefer not to, but these rates are just crazy.
You have a great plan going forward. It’s good that your traffic is only hit by 20% and you have a big lump sum amount coming for you.
Nice post.
I suggest you be very careful about leveraged investments. At a time like this, nothing feels better than being mortgage free.
I’d suggest keeping as much in retained earnings in your Corp for as long as possible. Your Corp tax rate, assuming <$500 k income, is so much better than personal. Dividends are great, but you can also pay yourselves income if you want / need CPP contributions.
Max out your TFSAs. RSPzs much less important given your new tax scenario. You could even consider withdrawing some RSP in low income years. Don’t expect your income to be lower in your 70s; try to stay under the OAS clawback limit.
Having a Corp gives you so much more tax flexibility, despite Morneau’s recent oppressive tax changes. There will likely be more negative changes to come.