Hire Expert Debt Consultants in Victoria, BC to Deal with Financial Emergencies

1. Dealing with a Financial Emergency www.4pillars.ca

2. Introduction We are living in financially scary and stressful times. Very few people can say their current or future financial situation is as healthy as it once was.  A huge amount of people are being impacted by a reduction in income, or have lost jobs and now relying on government subsidies. An incredible amount of financial uncertainty has been created and what might happen next as we enter what some fear will be the worst recession we have ever seen. Having a plan to navigate and survive a financial emergency can help preserve wealth, avoid insolvency, and prioritize essential spending. www.4pillars.ca

3. In this course you will learn the following: • What is a financial emergency • Warning signs of a pending financial emergency • How to use an emergency fund • When to cash out investments • How to prioritize spending • What to do when expenses exceed income • How to create a plan with no emergency fund or investments • When to use credit to survive a financial emergency www.4pillars.ca

4. What is a financial emergency Financial emergency means different things to different people. It depends very much on their situation and their stage of life.  Many people are already living in a state of financial emergency, and it is exhausting.  It becomes all-consuming, when every decision is driven by their financial situation and every waking thought involves money.  For the lucky ones, a reduction or loss of income means their concerns are how long will their emergency fund last before they need to access investments/retirement accounts. But, for many, they will be facing far more dire questions: Should I buy groceries or pay utilities? Should I cancel my life insurance payments to free up extra funds. The information in this course is going to cover a few scenarios. As many people you see will be somewhere in between the different scenarios and without the right plan many will be rapidly approaching financial crisis. www.4pillars.ca

5. What is an emergency fund The term emergency fund refers to money put away that can be used in times of financial hardship. The purpose of an emergency fund is to create a safety net that can be used to meet emergency expenses, such as job loss , reduced income or illness.  An emergency fund is cash or very liquid investments such as a cashable GIC. • An emergency fund is a financial safety net for unforeseen events and/or unexpected expenses. • Ideally an emergency fund should typically have three to six months worth of net income. • Emergency funds should be in accounts that are easily accessible and easily liquidated. www.4pillars.ca

6. How to set up an emergency fund The key to setting up an emergency fund is to start early. The sooner you start the sooner you will have a cushion against unexpected emergencies at a future date. Here are two ways to begin creating an emergency fund: • Set aside a comfortable amount from your income each month. Calculate your living expenses for one month and make that the first target. Set up a direct payment to a separate account each account each month. Make sure the account is not linked to your debit card to reduce impulse spending. • Set side tax refunds, or bonuses at work, save it. Typically, these windfalls are used for discretionary purchases. Instead of spending the tax refund or bonus, save it as a contribution toward your emergency fund. It will help your emergency fund grow quickly. Although the first goal is one-month of expenses, the goal is a minimum of 3 months. www.4pillars.ca

7. How much do I need in an emergency fund The standard financial planner approved answer to this question is that you should always have between 3 and 6 months of your net household income on hand to deal with unforeseen emergencies. To do this, it will be important to calculate your monthly expenses in order to figure out the magic number. The expenses are these: • Home • Heating and other utilities • Food • Clothing • Health insurance • Transportation www.4pillars.ca

8. How to fully understanding expenses The most important fundamental of managing a household is to track where the money goes. To truly understand what is required in an emergency fund, we need to understand: • Where is every dollar spent? • How much income is coming in? • How many payments are going out? How this tracked, and the system used doesn’t matter. Discipline is in tracking is what counts. To be better prepared to survive a financial emergency you need to track your spending. www.4pillars.ca

9. How to calculate expenses Sometimes it can be hard to know where all your money goes. The best method to start understanding your lifestyle and ways to make small incremental changes to how you spend your money is to start tracking it! One of the easiest budgeting methods to create is the “envelope method”. This method is simple to understand, easy to implement and very effective in creating a positive budgeting experience. It creates unique opportunities to maintain your lifestyle while saving money and this process empowers you to gain a new level of budgeting confidence. www.4pillars.ca

10. Tracking expenses using the envelop method The envelope method is one of the most tried and tested methods to track spending.  There are a lot of apps that can does and work very well for a lot of people, but one of the easiest ways to get started is the envelope method. Collecting the physical receipts and reviewing them creates a deeper level of commitment. Asking for a receipt after each purchase, knowing that it will be reviewed later in the week creates an enhanced awareness of how money is being spent. www.4pillars.ca

11. Tracking expenses using the envelop method Listed below is a 5 step plan to implement the envelope method: • Get an envelope and put it somewhere central in the house (refrigerator). • Begin saving receipts starting on the 1st of the month. • Every time money is spent, keep the receipt and put it into the envelope. • At the end of the month organize the receipts by category like gas, food etc. • Add up each pile and put them into a worksheet • This now provides a realistic view of expenses based on current lifestyle. www.4pillars.ca

12. Warning Signs of pending financial emergency • Cashing in investments to pay down debt • Calling to cancel their investments/insurance • Looking for a second mortgage – ask why? • Making minimum payments on credit cards • Over their limits on credit cards • Looking for consolidation loans or using pay day loans • Getting calls from collectors • Behind on paying taxes www.4pillars.ca

13. Scenario one: I have an Emergency Fund People in a more fortunate situation, will still have income, and were able to create an emergency fund. This does not mean there are no financial concerns.  This now means the main worries are, what if they lose their income and how long will the emergency fund last.  In the current environment, these are concerns of the privileged as many people do not have an emergency fund, income is reduced or now relying on government assistance programs. For those with an emergency fund – they are going to be tested and will see just how robust their emergency fund really is. The hypothetical amount determined during a period of financial stability may have seemed adequate back then, but is it enough now? www.4pillars.ca

14. Continued:With the future as uncertain as it has been in decades, the 3 month emergency fund, is what all personal finance experts recommend now, potentially seems like a random number plucked from the sky. So, during a financial emergency, the emergency fund needs to be respected and treated like it needs to last forever.  Until income has returned to normal, this is their lifeline.For those with an emergency fund – many will feel bad spending it. Their fear should be eased, and they should be praised, and feel proud. They have partially, if not fully created a cushion to get them through financial crisis. Human nature dictates that regardless of this, they will still find it hard to spend the money they have spent years saving for and hoping they would never need.This mindset needs to be discussed but will also serve them well as it means all steps will be taken to preserve the emergency fund.  www.4pillars.ca

15. Changing spending habits For clients facing a loss of income or a reduction of income a 3-month cushion doesn’t mean they should not change their spending habits.  An emergency fund isn't created to maintain a lifestyle when income was stable and not a concern. For those facing reduced income, the key is to try and live on the income they have, use the emergency fund only for critical expenses they cannot meet on the reduced income.  Preserving the emergency fund, will provide extra peace of mind and make it easier to replenish. Do not turn to debt instead of using your emergency fund. www.4pillars.ca

16. Do not turn to debt instead of using your emergency fund. Everything that people have been preparing for potentially comes to a screeching halt if they turn to high-interest debt because they are reluctant to spend their emergency fund. First, they should look to cancel the unnecessary subscriptions and reduce luxury spending.  They need to take a hard look at all expenses and what in the short term can be minimized or removed.  Monthly contributions to their RRSP and other investment accounts should be suspended.  Life insurance policies should not be cancelled as they will be more expensive to replace and key to protecting the family. As counter productive as it may seem, recommencing investment contributions should only happen after all urgent financial needs are covered and income is stable.  This is an emergency plan, missing a few months of investment contributions to avoid debt is very sensible. www.4pillars.ca

17. Scenario two: I have no emergency fund, but I do have Investments. For those without an emergency fund or it has been depleted and are considering cashing out RRSP’s or investments, first we must remember these aren’t technically an emergency fund, these are a retirement fund.  This will be a common scenario as many people begin investing before creating an emergency fund.  No one expects to ever need the emergency fund and the promise of high returns on long term investments is way more appealing than the low interest savings account used to house your emergency fund. The challenge is it may not be a good time to sell investments that were part of a long-term strategy. However, this is still a more enviable position than those without an emergency fund or investments.  Use investments to meet critical expenses, not pay down unmanageable debt. If debt is unmanageable or becoming that way, they should first seek professional advice before cashing out investments to pay off or partially pay down debt.  This is one of the biggest mistakes that can set back a financial plan by decades. www.4pillars.ca

18. Cash out investments vs incur debt Accessing investment accounts should be the priority vs going into debt.  No return on investments will be greater than the interest rates on credit cards.   Start by cashing in non-taxable accounts first.  A TFSA is usually the first place to start, then look at short term GIC’s and term deposits with zero or low penalties to access the funds.  This is money that has already been taxed and can be accessed without any future tax implications.  RRSP’s should be the last resort as it is taxable income.  Some tax will be withheld but not normally enough, so understanding what will be needed to pay next year and include this as a liability and part of the survival strategy.   As things improve, resuming contributions to the RRSP may offset the tax implications on the amount withdrawn. www.4pillars.ca

19. This will be a very common situation.  In many instances, income will not be enough to meet expenses.  If at all possible, we should always try and avoid taking on new debt.  It is better to find expenses and bills that can be paid later and defer them, than to take on new high-interest debt.First, assess the situation – How bad are things?This isn’t budgeting, this is short term survival and things are changing fast and the plan will be reviewed one month at a time. The first step is 3 tasks to complete;1. What bills are due in the next 30 days? 2. List them based on size of monthly payment.3. How much cash do you have on hand? Scenario three: I do not have an emergency fund and I do not have investments. www.4pillars.ca

20. Using Available Credit For those without an emergency fund or investments they will have no choice but to turn to available credit as a replacement for an emergency fund. We never want to use credit unless essential, but these are unique times with unique challenges and there are some essentials that will have to be put on credit given the loss of income. Make a list of all credit facilities, the balance and the available credit. This will also help understand what cushion is available to cover the immediate and necessary payments. When it comes down to prioritizing payments, housing, safety, food and health trumps everything. Going into debt to cover critical expenses is a necessity and there are many available options to deal with debt which we cover in our other CE credit training – Debt, Insolvency and Life Insurance. www.4pillars.ca

21. Taking on new debt If it can be avoided, it is best to avoid taking on new debt. If it is the only way to survive, then it must be done.  Taking on debt still needs to be done with careful consideration.  The first step is to create an emergency budget and figure out how much credit will be needed to subsidize income each month. Next step is to figure out how much credit is available and on which credit facilities. This new debt is going to have to be dealt with in the future, so it needs to be kept to a minimum and the lowest interest credit used first. Taking on debt can be exceedingly difficult and emotionally hard for some people.  After all, we spend our lives trying to avoid debt.  However, this is a unique situation and no shame incurring debt to survive a financial emergency. www.4pillars.ca

22. Summary A financial emergency is a temporary situation; things will get better.  When the financial situation stabilizes and income begins to return to normal, so will the financial planning.  So, it is imperative to keep reviewing and adjusting the plan created. As income returns to normal, contributions to investment and retirement should resume as soon as possible otherwise funds will be allocated elsewhere. If you carefully plan at the first signs of a financial emergency, many will be lucky enough to come out of this with only a few financial flesh wounds.  Their emergency fund may be gone, and investments reduced but they will have survived. In this case, it’s time to go back to the plan that got them through this in the first place and start again.  No one wants to start over, but they should be proud and commended they survived the crisis and learned from the experience. For many, debt will be simply unmanageable.  We believe Canada is going to see the highest level of delinquencies and insolvencies its ever seen.  This will create a new financial crisis and needs to be tackled head on.  The sooner it is acknowledge that debt is unmanageable the sooner it can be dealt with.  Many will feel guilt and remorse about their financial situation and may need reminding of prioritizing their health and safety, regardless of how bad it seems, any situation can be resolved with the right plan. This was not anyone’s fault and receiving the proper help and support will ensure that the most effective debt solution is obtained. This will be one of the most important financial decisions made during this entire process. It is imperative to review all options and get unbiased, unconflicted advice. www.4pillars.ca