TORONTO — Whether it's wildfire evacuations, a labour strike or an unexpected illness, experts say Canadians facing a short-term loss of income should navigate the disruption differently than a longer-term income loss such as a layoff.
“I’ve seen people give up a lot of short-term spending, knowing it’s going to be for a really brief time,” said Mark Kalinowski, a financial educator and credit counsellor at Credit Counselling Society.
“If you know it’s short and you have a target of when you’re going to go back to work and things are going to return to normal, when you do your budget, you can say ‘you know what, I don’t need to have Netflix this month, I don’t need to go to the coffee shop to buy coffee … for now, I can put these things off.’”
It's a different strategy than a longer-term income change, when you still need to “have some happiness in your life,” he said, because you don’t know how long it could take to find your next job. In an emergency, every penny counts.
Tens of thousands were forced to evacuate, leaving behind their homes and jobs, in Northwest Territories and British Columbia in recent weeks as wildfires raged on.
"In this situation, you have a bunch of different stressors weighing on you ... and then you have the money stressor on top of it," Kalinowski said.
In those types of more drastic situations, Kalinowski suggested talking to lenders about temporarily deferring their mortgage, credit card or auto loan payments, once they're out of immediate danger and in a more level headspace.
When dealing with a sudden income loss, Kalee Boisvert, a financial advisor with Raymond James, agreed that the first step is to cut expenses and pause savings.
This is also where an emergency fund comes into play, she said.
“Now is the time to tap into these reserves. Having a dedicated fund for unforeseen circumstances is a prudent habit. Don't hesitate to use these resources to navigate the current situation,” she said.
Meanwhile, unionized workers across the country, including at Ontario public broadcaster TVO and Manitoba’s auto insurance Crown Corp. are currently on strike. Until recently, grocery workers at Metro and B.C. port workers were also on strike. Other unions representing B.C. Ferries and Canadian autoworkers are in a position to walk off the job if labour talks fail.
Typically, unions have a reserve fund to pay workers while they’re on strike, but the amount is usually less than the employee’s regular earnings. If the labour stoppage drags on long enough, there’s also a risk the fund could run out of money.
“If you know the expected timeframe of the income disruption, create a budget that outlines your available resources and anticipated expenses. Even if the duration is uncertain, planning for the upcoming months can provide clarity on your financial options,” Boisvert said.
While the general rule of thumb for an emergency fund is setting aside enough for three to six months worth of expenses, the right size will depend on the individual’s situation. A dual-income household with no kids might need less money saved for emergencies than a single parent with two kids, Boisvert says.
“Even if you don't have much to spare, don't stress about it. Start with what you can comfortably manage. Even as little as $25 per month or per paycheque can make a meaningful difference over time,” Boisvert said.
Kalinowski says he thinks many struggle to save for emergencies because it can feel like you’re saving for something that might not happen while the rising cost of living increasingly chips away at household budgets.
A survey by Chartered Professional Accountants Canada earlier this week found about one-in-four respondents would not be able to come up with $500 in cash within one day without borrowing or selling an asset.
It’s an indicator that many people are struggling with their cash flow, the survey said.
However, another potential solution “that many forget about,” according to Kalinowski, is securing a line of credit ahead of time.
“I call it a security credit because this is credit where we really have no intention to ever use it but if something bad happens, it’s there for us,” he said.
“The trick with getting a home equity line of credit or a personal line of credit — that you’re never going to use unless something drastic happens — is that you have to apply for it while you’re working and your income is there.”
Boisvert says Canadians facing a prolonged income loss should consider all available resources, including tapping into investment accounts or accessing retirement plans, if necessary.
“Prioritize borrowed options with the lowest interest rates,” she said, “and keep in mind that withdrawing from retirement accounts will have tax implications.”
This report by The Canadian Press was first published Aug. 30, 2023.
Michelle Zadikian, The Canadian Press