Tightening the financial belt
Collette Skelly won’t be landscaping her garden this summer and she’s putting off a host of home improvements she once intended to make. “When there’s a lot of volatility in the markets and uncertainty about the economy, it’s time to sit back and wait to see what happens,” says the 56-year-old Toronto real estate agent. “It’s not a good time to go out and spend a lot of money.”
According to Lenore Davis, a 55-year-old registered financial planner and senior partner with Dixon, Davis & Co. in Victoria, surviving a recession isn’t rocket science.
Get up close and personal with your finances
If you’re not living beyond your means, you should be able to weather a downturn. “In reality, what do you need?” asks Davis. “You need clothes on your back, a roof over your head and food in your belly. Anything more than that is a want.” Unfortunately, many people tend to confuse wants with needs, says Davis. The result? What she calls “weeds.”
“Don’t panic,” Davis advises, “but take stock and look at things you could prune if you had to.” Can you take your lunch to work? Can you do popcorn and movies at home for a third of the cost of a theatre? You may need a new coat, but do you really need that $400 leather jacket?
Of course, in order to determine how to scale back, you first need to have an intimate understanding of what you spend. “When I meet a client for the first time, I ask her to draw up a budget,” says Davis. “She gives me some nice global numbers. Then I get hold of her tax returns and her pay stubs and I say, ‘Okay, you’ve identified $40,000 in spending, but you’re taking home $50,000.’ What we usually find out is a lot of that missing money is ATM withdrawals and it just goes into a black hole.” The bottom line: If you want to weather this kind of uncertainty, you have to “look at the nickels and dimes.”
Control your debt level
Maureen Murdoch, a 47-year-old lawyer in Jasper, Alta., admits the chill wind of the economic slowdown came at just about the worst time for her family of four. She and her husband, Bill Smith, who is semi-retired, bought a cottage two years ago, and last year (just before all hell broke loose in the market) they replaced both of their aging vehicles and purchased a boat. “There was no way around it,” says Murdoch. “We needed reliable vehicles. I work out of town and the kids are in sports, so we’ve been driving them all around the province. But the timing was bad.”
As a result of the purchases, Smith and Murdoch have chalked up about $50,000 on their line of credit, and the experts agree — unless your job is ironclad and your financial picture rosy, it’s not a good time to take on a lot of new debt. Realizing that, the couple is making a concerted effort to pay off the borrowed money. “The goal is to put down $1,000 a month on the line of credit and have it paid off in five years,” says Murdoch. “So now we are getting into fiscal tightening mode.” They’ve scaled back on improvements at their cottage and “all major purchases are on hold.”
That’s wise, says Davis, because paying down debt gives you even more bang for your buck than investing, particularly in such a volatile market. By paying down a credit card, for example, you can eliminate the interest charged on that debt — in some cases, 18 per cent or more. “So you’re making an after-tax return of 18 per cent without speculating.”
