How to prepare for sudden financial challenges
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Moving up the pay grid, reaching your 85 or 90 factor, collecting your hard-earned pension — these ‘constants’ are part and parcel of being an education member.
However, the journey from your first day on the job to reaching your retirement isn’t exactly a straight line. Change, as they say, is the only true constant. And while that can be a good thing, it can also bring uncertainty.
The prospect of a job loss or interruption, for example, is the type of change that nobody likes to think about. Yet it’s a reality that you, your colleagues, or even your family members could potentially face and/or be impacted by. Learning how to navigate these types of challenges puts you in a better position to not only prepare for uncertainty, but to come up with solutions (particularly where your finances are concerned).
The first step to being prepared: know your basic budget.
The typical budget consists of a healthy balance of ‘needs’ (rent, mortgage, food, etc.) and ‘wants’ (eating out, travel, hobbies, etc.). Should things suddenly get tight financially, your typical budget won’t apply. Knowing your basic budget for this scenario—i.e. exactly how much money is required to cover the essentials—will enable you to immediately identify where to cut back (or cut out).
Here’s how to build a budget that works.
Find room in your budget to build up your emergency fund.
Cars can break down. Roofs can spring a leak. A full withdrawal of service (or even a job loss) could happen out of the blue. Having an emergency fund in place puts you in a better position to stay afloat when the financial waters get rough—without having to rely (solely) on credit cards or other forms of debt. As a rule of thumb, you should aim to have 3 to 6 months of expenses saved up, just in case.
Tips for setting up an emergency fund:
- Choose the right kind of account (keeping in mind it should be easy to access when you need it). The account should be separate from all other accounts, i.e. only for emergencies. It should have no (or low) fees, and you should be able to make withdrawals without penalty.
- Automate your contributions, such as with pre-authorized contributions.
Put your emergency fund-building plan into motion.
If you have debt, make it a priority to pay it down sooner rather than later.
Regardless of whether you’re working full-time or are occasional/support staff, debt repayment can take up a big portion of your monthly cash flow. If that cash flow was to suddenly lessen, it could be even more challenging to continue making those payments.
That’s why the time to have a debt repayment strategy in place is when you have regular income coming in.
If you have multiple high-interest credit cards and loans, paying down debt may be a little more challenging.
In this case, you may want to consider debt consolidation. Consolidating has the potential to free up some extra cash and make your financial situation more manageable.
Tip: Always pay your credit cards and loans on time. When a financial emergency arises, you may need to rely on credit to cover what you lack in savings. Keeping your credit in good standing will ensure your borrowing capacity remains intact and at the lowest rate possible.
If your debt is under control, get pre-approved for a line of credit—just in case you need it.
Tapping into savings should always be your first choice when dealing with a financial curveball. Yet depending on where you are on the pay grid, building up those savings can be a challenge. If you only recently developed your savings plan, there’s also the possibility that you haven’t had enough time to build those savings up.
That’s where getting pre-approved for a low-interest loan (or line of credit) can be your ‘financial emergency backup plan’, should you need it.
Also be sure to have a withdrawal strategy in place when it comes to your investments.
Depending on the financial challenge you’re faced with, you may find yourself needing to borrow from your investments. Just be sure to keep in mind any tax implications.
For example, while you can withdraw from your RRSP in emergency situations (as long as it’s not ‘locked-in’), you’ll immediately be taxed on the amount you take out. You’ll also permanently lose the RRSP contribution room you used to make the original contribution. Plus, you’ll have to report the full amount you withdrew on your tax return as income. This could result in having to pay further taxes on that withdrawal, in addition to the withholding tax.
This is where leveraging a TFSA makes more sense for emergency situations. Any withdrawals are tax-free and you don’t lose the contribution room forever—you can recontribute that amount to your TFSA the following year or any year after that.
Read 3 tips to truly maximize the benefits of a TFSA.
Above all, as an education member, the best way to prepare for sudden financial challenges is to get expert, educator-specific advice.
Having served education members since 1975, Educators Financial Group knows the unique elements that make up your financial world. This means no matter where you are on the pay grid, or what your pension income is in retirement, we can show you how to maximize your cash flow so that you can be better prepared to handle any financial challenges that come your way.
Reach out to one of our financial specialists today.
Are you already facing that unexpected change to your employment and financial situation? Get started with ITWORKS, Educators’ step-by-step, practical toolkit for education members who have been laid off.
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