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With the cost of goods rising and interest rates climbing, some Canadians are looking to their pandemic and emergency savings as much-needed support in covering their expenses – whether essential items or non-discretionary purchases.
But advisors say finding strategies to protect and even bolster that cash cushion instead puts clients in the best position to handle future challenges with a recession looming.
For some, the need to draw on savings began in the spring. In a survey released in June by Bromwich & Smith and Advisorsavvy Inc., 28 per cent of Canadians aged 35 to 54 reported dipping into their savings, investments, nest eggs, or emergency funds in the previous month compared with only 17 per cent who added to these accounts.
Wendy Brookhouse, financial advisor and money coach with Black Star Wealth in Halifax, says some clients had an initial reaction to move money from their savings accounts when interest rates and the cost of goods, including grocery prices, began to rise earlier this year. However, this was short-lived as they came to terms with the new reality.
“They may have dipped in a little bit at the front end, [but] what I’m seeing more likely to happen is a slowing of maybe paying down debt or a slowing of savings,” she says.
“I don’t necessarily think they’re going into these nest eggs they’ve created for the long term. [They’re] more into making some adjustments on the day to day.”
Clients have been through so much, and they should save as much emergency and buffer funds as they can right now, Ms. Brookhouse adds.
To protect their savings, she says, some clients have been implementing changes around spending – focusing on bulk buying, holding off on the purchase of “wants” and thinking twice about paying convenience premiums for services such as food delivery.
For other clients who were perhaps considering other plans for their savings, such as increasing their mortgage payment in anticipation of interest rates being higher when they renew, she says they should consider a different approach that keeps their funds accessible.
“Maybe we’ll save it and then we’ll use the lump sum when it’s time to renew, because that way, we still have access to it for emergency funds if we need it,” she says.
Some ‘people have overspent’
Daniel Frost, financial advisor and certified cash flow specialist with The Frost Group at Raymond James Ltd. in Medicine Hat, Alta., did see some clients hanging onto more of a cash cushion in the bank during the pandemic. But for the most part, he says, people returned to their normal spending habits quickly.
As the Bank of Canada noted in its Canadian Survey of Consumer Expectations for the second quarter of 2022, households planned to spend significantly more over the next 12 months, supported by the extra savings some accumulated during the pandemic, which amounted to some $190-billion in additional funds in chequing and savings accounts as of summer 2021, according to TD Economics.
With large weddings returning and children going away to university again, clients have been deploying some savings, Mr. Frost says. At the same time, many have also overspent on big-ticket discretionary items such as recreational vehicles, travel or undertaken significant home renovations by accessing debt, which has left some at risk of the effects of rising interest rates.
“It’s almost the perfect storm in which people have overspent. They’ve taken equity that they had that didn’t cost them anything. Now, they’ve moved it into a home equity line of credit and they’ve spent some of the money,” he says. “Interest rates have gone up and so, the payment on that debt has doubled.”
In a rising interest rate environment, Mr. Frost has not only been encouraging clients to save, but also advising them to delay major purchases and have more conversations before spending outside of their normal routines.
Less have emergency funds intact
With a potential recession looming, Robyn Thompson, president and certified financial planner at Castlemark Wealth Management Inc. in Toronto, says it’s crucial that clients have an emergency fund intact – not only for the comfort of being able to cover expenses during a worst-case scenario but to protect the rest of their portfolio.
“It’s really about the peace of mind factor for clients in knowing that they already have that set aside and they don’t need to draw down from their investments in a period like this,” she says.
However, as the Financial Consumer Agency of Canada’s COVID-19 surveys on financial well-being found, only 43 per cent of participants in 2022 said they had an emergency fund that would cover three months of expenses, compared to 64 per cent in 2019.
In the current climate, she says, clients should be focusing on building up these funds by paying themselves first each month. For extra savings, Ms. Thompson says there’s also an opportunity to take advantage of higher returns in cash markets that haven’t existed in years, which will still allow clients to keep funds accessible.
Ultimately, those who choose to make decisions related to emergency savings or excess cash now should start by questioning the purpose of the withdrawal and consider the implications for the rest of their portfolio should other financial challenges arise in the future, she says.
For example, it’s essential that they’re clear on what constitutes an emergency, she says. That’s generally anything from job loss to a necessary home repair or paying down high-interest debt rather than an account to dip into for discretionary expenses.
“If you make ill-timed or hasty decisions based on emotion or things you want versus things you need, it could cost you the future compounded return of the money you have in your investment accounts if you’re forced to dip into them,” Ms. Thompson says.
“It’s about understanding the decisions that you’re making and the longer-term impact of those decisions within your financial plan.”
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