Recession-proof your finances

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.”

Collect on money owing

Murdoch has also made a point of getting her billings on track at work. “I’m self-employed,” she says. “I’ve been doing monthly billings on smaller accounts too, rather than waiting and letting the amount owing get bigger. If the economy changes for the worse, there’s always a chance people won’t be able to pay their bills.”

Set up a rainy-day fund

If you don’t already have an emergency fund, it’s time to establish one. That way you’ll be able to cope if you’re confronted with one of life’s costly surprises, from temporary job loss to a necessary car repair. Ideally, says Davis, your fund should enable you to cover three to six months’ worth of expenses. Can’t come up with the cash in the short term? At the very least, make sure you have a line of credit to tide you over in a pinch. “It’s best to get a line of credit while you’re still employed,” points out Davis. “Banks aren’t crazy about handing out money once you’ve lost your job.”

Stay working

Susan Cottrell* of Toronto, 55, works two commission-based jobs in publishing sales, but she’s not sure either of her employers will make it through the current downturn. “I’m actively pursuing other things before the bottom falls out,” she says. “I spend a couple of hours a day on Workopolis and Craigslist, as well as sending out letters and resumés.” 

Even if you’re not planning on job hunting, it’s in your best interest to network by attending industry association meetings or seminars, or keeping in touch with former colleagues, advises Rick Richter, an executive recruiter with Wwwork.com in Toronto. “That way if you’re downsized or your company closes, you can hit the ground running. You have some contacts to call on.” He also suggests updating your resumé and applying to any interesting positions posted on a job site like Monster.ca.

Hold on to your home

House prices in Canada have definitely softened since their peak. Nationally, the Canadian Real Estate Association is predicting a 2.1 per cent drop in housing prices in 2009, with areas like B.C. — expecting a 7.8 per cent decline — particularly hard hit. Skelly hasn’t yet seen prices drop dramatically in the downtown Toronto neighbourhood where she sells real estate, but says houses are definitely not moving as quickly. “It used to take a week for a house to sell,” she says. “But I’ve had a house on the market for five weeks now and another for three weeks. People aren’t jumping on things like they did before.”

If you’re looking to cash out your house to pay for retirement, hold off until at least spring, she advises. And if you must sell now, make sure the deal is sealed before you buy another property. “You might have to live in someone’s basement for a while, but that’s better than having to carry two houses,” points out Skelly. “And I’m anticipating it is going to be more difficult to get bridge financing.” On the other hand, she speculates, it’s probably a good time to purchase an investment property. “First of all, there are likely to be more renters out there in future and secondly, with houses sitting on the market longer, you have a better chance of getting a good buy.”

Protect your investments

“It’s not easy for anyone,” says Davis. So what is the financial planner doing with her own money? “I’m letting it ride,” she says. “I have a strategy and I’m sticking with it. The only way to ensure you will lose your money is to sell when the market is down.”

Market volatility has happened before and it will happen again, affirms Patricia Lovett-Reid, a senior vice-president at TD Waterhouse Canada. That said, it’s a good time to go back to basics and make sure your portfolio asset mix is a true reflection of your risk tolerance and investment objectives. “Gone are the days when you can buy a good name and sleep on it,” she says. “If you’re not already actively monitoring your portfolio, you need to.”

The key to reducing the ups and downs is to have a solid mix, including quality stocks, bonds and cash. Although cash and investment-grade bonds (the lowest risk category) generate paltry returns, they can even out the lows when the market is volatile. As for stocks, Lovett-Reid advises investing in blue-chip equities in such sectors as telecommunications, healthcare and consumer staples — things that people need even in a down market — and preferably those that pay dividends.

You might also want to weed out the dogs in your portfolio — the consistent underperformers — to free up cash. You can use those losses to offset your capital gains, reducing your tax bill, suggests Lovett-Reid. “And you can carry them back to the previous three years, so that can put some money in your pocket.” That said, she doesn’t recommend a wholesale sell-off of your equities. The TSX index has never lost money over any five-year period, she points out, and the markets are forward-looking, so they’ll move before the economic data tells you it’s time to buy again. “Then you have the issue of keeping up with taxes and inflation.” There’s nothing wrong with having cash on hand for emergencies, to reduce the volatility in your portfolio or for opportunistic purchases (of well-priced stock, for example). But over the long term, Lovett-Reid contends, “holding only cash can be detrimental.”

Retirees, she points out, are the most vulnerable in a market storm because they have to withdraw money in order to live. But rather than selling stocks while they’re down, Lovett-Reid suggests belt tightening. “It’s not fun, but you have to be realistic in facing your financial reality.”

What about those of us who worry that our retirement is receding farther and farther into the future? Hang in there, advises Lovett-Reid. “We can’t control the market. But one thing we can control is our emotions, and sometimes doing nothing is exactly what we should be doing.”

*Name changed by request

This article originally appeared in the February/March 2009 issue of More