Rebalancing Your Finances: How to Set Yourself up for Success Coming out of the Pandemic
You’ve heard it a million times in the past few weeks, but these are daunting times. If you’re being paid to work from home then your largest problem is being housebound. Unfortunately, that makes you one of the lucky ones. As Allied Health Professionals during this time, most of us have taken a hit to our income and some of us have even lost our jobs. This has led to a significant number of us now spending more than we earn. The first thing to do is take a deep breath and recognize that you are not alone. We’re here to help you navigate the situation and how to minimize debt.
If you’re no longer able to see patients in person as a result of the pandemic, you’re likely bringing in significantly less income than before the COVID-19 pandemic took hold in Canada. If you’re claiming CERB then you are earning $2,000 per month and maybe an additional $1,000 via telerehab or other income streams. Let’s figure out how to organize your income against your expenses to make the most of it. The first step is to check your budget to see how your current income measures up to your expenses. Start by categorizing your fixed expenses (costs that are the same month to month) into essential and non-essential - if you do not have a budget you can start one by downloading our Financial ToolKit here. For example, rent would be essential where as a gym membership you can go without for the time being.
Once you have an idea of how much you spend on a monthly basis and compare it to what you are earning, it becomes apparent if your situation is sustainable or if you are cash flow negative (spending more than you earn). Once again, fear not. If your expenses are more than your income you are in good company and this will be over soon. However, you’ll need to draw money from other sources to cover you in the meantime. There is an appropriate strategy, and we’re here to help!
My Income Can No Longer Cover My Expenses, Where Do I Go Next?
The goal here is to find the most efficient way to use your money to cover your expenses. Your goals here are to avoid tax penalties, take on as little debt as possible and make the recovery process as pain-free as possible. You can think about this strategy as rungs on a ladder. You start at the top, and climb down the rungs as you need to in order to access more of your money. This way, you can be sure your money is spent as efficiently as possible. When it comes time that your income is greater than your expenses again, you can reverse course and climb back up the ladder. Lets get climbing and take a look!
1) Emergency Fund
If you have an emergency fund, you’re an all-star. An emergency fund is money you have set aside (usually 3-6 months worth of essential spending) that you can access to help pay off unforeseen expenses. These range from the breakdown of a car or fridge to losing your job. The benefit is that you don’t have to borrow money to cover these costs, which will save you interest payments in the long run. For example if you need to pay $2,000 to fix your car, you can borrow from the “Bank of You” with no interest. You’ve saved this money and it’s there for you to use in these situations. However, let's say you don’t have an emergency fund, and you need to put this on a credit card. A typical interest rate is 20%, and if you put $200/month towards your loan it would take you a year to pay it off and you would pay over $200 extra in interest payments. When possible, avoiding debt is the best option, so tapping into your emergency fund is the ideal first step in this process. To learn more about how to develop a robust emergency fund, click here.
Note: if you’ve exhausted your emergency fund or have yet to build one, we suggest limiting any deposits into your investment for now. Keep in mind that the end goal of this process is to avoid high interest debt. Your emergency fund is only meant to cover necessary spending and if you use it to invest, you’ll drain it faster and increase the likelihood that you’ll need to take on debt.
2) Personal Investing Account (PIA)
The next step on the ladder is your personal investing accounts - or accounts that hold investments but are not registered. They have no tax advantages and you have to pay tax on dividends and capital gains. So why remove money from this investing account first? When you withdraw money from a PIA, you don’t encounter any tax penalties. You can sell off these assets as you need to, and turn them into the cash to cover your expenses. Whoa, hold up! but you should never sell low! While this is true, these are tough times and the money has to come from somewhere. If it can’t come from an emergency fund, this is the next best option. The average yearly stock market return is 5% so it makes no financial sense to keep money in this account while taking on 20% interest on a credit card. Lastly, you can write off any losses you incur due to selling investments against your taxes to help decrease future taxes owed. To learn more about PIAs click here.
3) Tax Free Savings Account (TFSA)
Next up is the TFSA. Unlike your RRSP, you contribute after tax dollars to your TFSA, so there are no tax penalties for withdrawing money from this account. It is suggested that you draw from your TFSA after your personal investing account because any returns on your investments held in a TFSA are tax free. This increases the compounding effect of investments in a TFSA and builds your wealth faster, so you’ll want to keep these funds in your TFSA as much as possible. You’ll regain the contribution room to your TFSA on January 1st of the following year. To learn more about TFSAs click here.
4) Line of Credit
We’re getting to the lower rungs on the ladder, and if you find yourself here, rest assured that you’re doing what is necessary for yourself and your family in the most efficient way possible. If you have access to a low interest line of credit such as a personal line or home equity line, we would suggest using it after exhausting your PIA and TFSA. The rates can be anywhere between 3-8%. Using a line of credit, you’re borrowing money at a lower rate than other options that we’ll discuss in the next sections.
5) Registered Retirement Savings Plan (RRSP)
Your RRSP is the last account you’ll want to pull from because you’ll take a tax penalty for withdrawing funds. Withdrawals are subject to a withholding tax, and the more you take out, the higher the tax. Withdrawls of up to $5,000 are taxed at 10%, $5,000-$15,000 at 20%, and withdrawals of $15,000 or more are taxed at 30%. These withdrawals are also counted as income, so if your marginal tax rate is higher than the withholding tax rate you’ll owe additional tax. This remains (slightly) preferable to credit cards as you won’t have to pay interest on the withdrawal, but you’re paying taxes on money that was meant to sit and accumulate for years which cuts into the benefits of compounding. To learn more about RRSPs click here.
6) Credit cards
Our least favourite option is using a credit card. Most cards carry rates of about 20% (although there are some cards with lower rates) and take a significant amount of time to pay down. Furthermore, putting money on a credit card compounds your reduced cash flow by adding monthly payments to your budget. Overall, if this is your only option, you’ll have to use it to make ends meet, we suggest building an emergency fund as soon as you're done paying off the debt you’ve incurred during this situation.
Let's take a look at how some of our payment options compare to each other:
This table shows how important it is to avoid high interest debt as much as possible. It will stop you from making costly interest payments and bring you back to financial stability sooner.
I Already Have Debt, Do I Keep Paying It Off?
Most of us have debt we need to pay off whether it’s credit cards, car payments, student loans, etc. The format the ladder stays the same, however there are additional things you can do to make things easier when paying off debt. Some debt payments may have been reduced or even postponed (such as some student loans or mortgage payments), so if it stops you from taking on high interest debt, we suggest taking advantage of these programs. If some of your debts (like credit cards for example) do not offer these programs, here are some general steps to follow. You can also read more about fast and effective debt repayment here.
1) Consolidate Your Debts
If you can obtain a line of credit for a lower interest rate than you’re paying for other debts, it makes sense to consolidate them. For example, if you owe 6% on a car loan, 20% on credit cards, and can put them both on a 4%personal line of credit, do so. You’ll save a significant amount of interest in the long run and have only one larger repayment each month.
2) Contact Your Creditor
As we discussed above, some creditors allow you to push back your payments and put a pause on the interest accumulation or lower the interest rate temporarily. Although this doesn’t lower your amount owing, it reduces the balance accumulation and can limit the amount of further debt you take on in the short term when trying to make these payments.
3) Pay Off High Interest First
If you can’t consolidate your debts, try to pay off the higher interest loans first (this is called the debt avalanche. The interest in these accounts accumulates faster and takes a longer amount of time to pay.
How Do I Learn More?
We know it's difficult to manage money. As an Allied Health Professional, you’ve dedicated your professional career to helping others. Allied Health Financial’s mission is simply to equip you with the knowledge to make the most informed decision possible. As we like to say, “You’ve got your clients back, we’ve got yours”. Becoming financially literate takes time, and everyone has an opinion on how to approach different topics. We’ve put together a wealth of information (no pun intended) made specifically for Canadian Allied Health Professionals. To learn more, please check out our website and sign up for our Financial Toolkit to help you take control of your financial future and keep updated on our weekly blog posts. You can also keep in touch with us on social media via Facebook, Instagram, Twitter and LinkedIn.
We look forward to helping you take control of your finances and reach financial freedom. If you have any questions for us please send us an email at email@example.com
Giacomo Silvestri & Ryan Wells
Giacomo Silvestri, MScPT, BA Kin (Spec. Hon.), Dip Manip PT, FCAMPT
Giacomo is an outpatient orthopaedic Physiotherapist working in downtown Toronto. He became interested in personal finance while earning his MScPT at the University of Toronto.
After graduating with over $70,000 of student and consumer debt he decided to dive even deeper into personal finance, investing and all other things financial future related. His interests include budgeting, index investing and insurance planning.
He went from having no interest in personal finance and investing, to understanding how important it is to secure a stable future. He hopes to help you do the same.
Ryan is a Physical Therapist living in Toronto, working in outpatient orthopaedic clinic. He received his MScPT from the University of Toronto in 2014 and has been an avid investor ever since.
Starting from the ground up, his research interests range from personal finance and economics to psychology and behavioural economics.
Shortly after entering the workforce, Ryan noticed several deficits in self-employed health care professionals’ financial knowledge. Ever since he has dedicated himself to educating Allied Health Professionals in Canada.