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.

A dead cat bounce is a temporary resurgence in stock prices after a substantial fall. The phrase originated on Wall Street, derived from the idea that “even a dead cat will bounce if it falls from a great height.” 

That’s what investors saw last week as stock markets rallied for three days before slumping again to close out the week. Here’s what the S&P 500 and TSX Composite Index looked like over the past three months:

At its low on March 23 the TSX was down an incredible 34.2 percent – with most of the damage coming in just a one-month period. The S&P 500 hasn’t fared much better, down 30.75 percent over the same period. 

Investors who panicked and sold at the bottom missed out on this brief rally. As swiftly as markets have fallen, prices can rise just as fast. Look no further than March 24, where the TSX surged nearly 12 percent in a single trading day.

But the dreaded “dead cat bounce” theory surfaced Friday when stocks fell again by 5 percent. It seems we’re not out of the woods yet.

As you can imagine, I’ve received a lot of questions from readers and clients about the current state of the market. Here’s what I know:

Honestly, no one knows what happens next. Markets fell so fast and so quick. It’s unheard of to see a 30+ percent drop in one month. For perspective, the worst month of the financial crisis only saw a 14 percent decline.

Many are saying the worst is yet to come because North America hasn’t reached the peak of the pandemic and job numbers are going to look awful. But you could easily argue that the market knows this already and bad news is already priced in. Who knows?

I wouldn’t be surprised if markets fall another 10-20 percent. I also wouldn’t be surprised if we’ve reached the bottom and markets start to stabilize.

Stick to your plan, and rebalance if you can. Mind your personal finances and ensure you have enough cash (or income) to survive the coming weeks and months. Consider delaying any large expenditures planned for the year. One client planned to build a garage this year – that project has been moved to 2021. Perhaps you can divert money earmarked for travel to go into your emergency fund instead.

Much has changed since I shared my 2020 financial goals. Next week I’ll share with you how I’m managing our personal finances and investments through the COVID-19 crisis. Hopefully it gives you some ideas to consider for your own financial plan.

Until then, stay well and stay home!

This Week’s Recap:

Falling interest rates have forced many banks to lower their rates on savings deposits. This week I compared high interest savings accounts to GICs to determine where savers and investors should park their cash.

From the archives: Using annuities to create your own personal pension in retirement

The latest Bank of Canada interest rate cut took its key lending rate down to 0.25 percent. The banks have passed along the decrease to their own prime rate – which means our variable rate mortgage just fell to an unheard of 1.45 percent:

😳 pic.twitter.com/adItRXZEzQ

— Boomer and Echo (@BoomerandEcho) March 28, 2020

Promo of the Week:

Canadians can get their Equifax credit score for free from online lender Borrowell. It won’t affect your credit score and Borrowell uses bank-level encryption to ensure your information stays safe. 

Get your free credit score here.

Weekend Reading:

An important read – Credit Card Genius explains how to protect your credit score during the Coronavirus pandemic.

Exchanging credit card points for gift cards is typically a poor financial move, but Barry Choi argues that using your points to help pay your bills or expenses might be an excellent idea in challenging times.

Zoom Video Communications stock (NASDAQ: ZM) is thriving as employees are working from home and using its technology to stay connected. Zoom Technologies, a Chinese holding company, has also seen its shares spike as investors confuse the two Zooms.

Rob Carrick says banks are trying for a kumbaya moment with their virus response. Can you trust it?

“When banks are e-mailing to say they’re here to help you through this crisis, you might expect at least a touch of self-sacrifice.”

A Wealth of Common Sense blogger Ben Carlson shares a guide to surviving your very first market crash.

Michael James writes a thoughtful response to a reader asking what to do about the stock market crash.

Preet Banerjee has put together a list of free financial consultations and resources for people in need during the Coronavirus pandemic:

Please give Preet a follow on Twitter and on Instagram as he has been diligently putting together helpful videos to explain the Canadian Emergency Response Benefit, and the new temporary wage subsidy (among others).

How the humble GIC goes from schlub to stud in just four weeks as stocks tumble.

Half Banked blogger Des Odjick shares how she’s managing her money during the COVID-19 chaos.

Ben Carlson also shares how he’s managing his own money through the crisis.

Wise words from My Own Advisor Mark Seed, who says there is no perfect personal finance plan to combat something like this.

Nick Maggiulli writes about buying during a crisis – a new framework for investing amid financial panic:

“There is a silver lining for investors who are buyers of equities right now.  Every dollar they invest in the current market environment will grow to far more than one invested in months prior, assuming that the market eventually recovers.”

Along the same lines, writer Chris Taylor says, if you can, increase your retirement contributions right now.

Pandemic personal finance update: Three things you can do right now to defend your family finances.

While market crashes can be seen as a positive for those in the accumulation phase, it’s a different story for retired folks. Here’s how the market crash impacts retirees.

Finally, the Irrelevant Investor Michael Batnick explains how to fight hindsight bias.

Stay well, everyone!

Cash is king during times of economic trouble. Working families need emergency savings to pay the bills in case of job loss or a reduction in wages. Retirees or near retirees need a cash cushion to avoid selling stocks at a loss. But should you park your cash in a high interest savings account or a GIC?

For a short time, not too long ago, we lived in the golden age of high interest savings. The competition was lively, as online banks and credit unions pushed interest rates well above 2 percent (LBC Digital briefly paid 3.3 percent). Rising interest rates on savings deposits made GICs look less attractive. GICs paid the same rates or lower, yet savers had to lock-in their deposits for 1-5 years. Where did the liquidity premium go?

High Interest Savings Account rates

The situation quickly changed when the coronavirus pandemic forced central banks to take emergency action and cut interest rates. The Bank of Canada lowered its key interest rates by 50 basis points on two occasions. The ripple effect caused high interest savings account rates to plummet.

LBC Digital had already lowered its rate to 2.8 percent – now it sits at a still respectable 2.25 percent. Wealthsimple Cash had arguably the worst-timed launch when it came out with a 2.4 percent interest rate for its chequing/savings account hybrid. That rate was quickly dropped to 1.9 percent, and then lowered again to 1.4 percent.

EQ Bank lowered the interest rate on its Savings Plus account to 2 percent, while motusbank dropped its rate to 1.75 percent. What a difference a month makes!

Here are the top high interest savings account rates today (March 25, 2020):

As always, savers need to look beyond the big banks to maximize the interest earned on their deposits. If inflation averages 2 percent, then you need to earn at least 2 percent on your savings to maintain purchasing power. Even still, at best you’re treading water.

Despite the recent drop in rates, a high interest savings account is still the best place to park your emergency savings. You never know when you’ll need to access cash for an unexpected bill, or to pay for your living expenses during a period of unemployment.

A high interest savings account is also a must-have for retirees and near-retirees to stash one year’s worth of spending – the first bucket in the three-bucket approach to retirement income planning.

What this current rate crisis has highlighted is the fact that high interest savings account rates are not guaranteed. Those who eschewed GICs to chase higher yielding savings accounts now find their savings account paying 0.50 – 1.00 percent less than it was a month ago. Not ideal.

GIC rates

One of my clients recently alerted me to an email sent by Oaken Financial advertising an increase in GIC rates. Its one-year GIC now pays 2.5 percent, which is a full 25 basis points more than the top-paying high interest savings account. Oaken’s five-year GIC now pays 2.95 percent interest. It looks like the liquidity premium is back.

You’ll easily find one-year GIC rates paying at or above the best high interest savings account rate.

Longer-term rates vary widely so be sure to shop around for promotions. Here are the top five-year GIC rates as of this writing:

Readers should know that GICs are typically non-redeemable, so you should be absolutely certain that you won’t need the money when you lock it in for 1-5 years.

That means GICs are ill-suited for an emergency fund, but ideal for a goal with a specific time period.

Using High Interest Savings Accounts and GICs for Retirement Income

For retirees and near-retirees, GICs are best-suited for “bucket two” in your three-bucket approach to retirement income. Bucket two is where you build a GIC ladder with three to five years of annual retirement spending.

Let’s assume that your annual spending is $60,000 and you expect to receive $12,000 from a defined benefit pension plan, $8,800 from CPP, and $7,200 from OAS. You have a total of $28,000 from these sources, meaning you require an additional $32,000 per year from your retirement savings.

You’d ideally put $32,000 into a high interest savings account for this year’s living expenses – transferring funds to your chequing account as needed. This is bucket #1.

Then, you’d put $32,000 each into a one-year, two-year, and three-year GIC (total of $96,000). This is bucket #2. When the one-year GIC matures, transfer it to a high interest savings account to replenish bucket #1.

Bucket #3 contains your investment portfolio of stocks and bonds (ideally in low cost ETFs). Each year you may sell bonds to replenish the money in bucket #2, and then rebalance your investment portfolio (potentially selling stocks to replace your bonds).

Using a high interest savings account and GICs in this way provides retirees with a safety net of retirement income so they’re not forced to sell stocks during falling markets. Practically speaking, that means a retiree could delay withdrawals from his or her investment portfolio in a down year like this – knowing there is four years of spending available in cash and GICs.

Final Thoughts

Cash (or access to it) plays a crucial role in any financial plan. Its importance is highlighted even more during tough economic times, when we’re faced with massive layoffs and falling stock prices.

Well-prepared savers have even been hit by declining interest rates on deposits. My advice to savers is twofold:

1. Park your emergency fund or short-term cash in a high interest savings account that pays 2 percent or more. Respect CDIC limits ($100,000) and ideally keep no more than one year’s worth of expenses in this account
2. Put additional cash savings into a GIC (or GICs) while being mindful of when you’ll need to access the money. Is it worth an extra 25 basis points to lock your money in for five years? Consider a shorter term or a GIC ladder approach.

Readers: Where are you parking your cash these days?