Surviving a Worst Case Scenario
Financial experts strongly recommend that you perform an assessment of how long you can survive on your savings in a worst case scenario. How long will you be able to maintain your present state if you suddenly find yourself jobless or lose your main source of income? You must immediately work on the numbers so that you know where you stand.
What is the first thing that you must do if you find yourself in this tight situation? You have to focus on your household expenses and determine which cost items can be reduced or eliminated, at least for the meantime. Once you have worked on the outflow side of your finances, the next thing that you must do is to assess the income types that are available. This means that you will have to look at your existing savings account and investment portfolio. Decide which items you can liquidate to improve your cash flow. Your last resort will be to consider your debt options and the liquidation of your retirement fund.
Here is a list of assets which you have to assess in order to determine your present financial condition:
1. Employment insurance – This safety net sets in within 4 weeks from the time you were separated from your job. This financial relief will last for 12 months. The upper limit of employment insurance is about $1,500 per month net of deductions and taxes.
2. Cash Savings – This is the time where you are going to rely on your savings. If you had the foresight and a good sense of management of your finances, then you can definitely rely on this asset item.
3. TFSA – You can withdraw your TFSA tax free and use it as your emergency fund while you are still looking for a job.
4. Unregistered Investments – If you have leveraged some unregistered investment accounts that yield dividends, then you can liquidate them when the need for cash arises.
5. Line of Credit – If you already have a substantial home equity, then you can apply for a credit line that offers competitive rates. However, you have to remember that the interest rate will increase as you increase your credit exposure.
6. Retirement Funds – Your retirement funds must be your last option when it comes to generation of much needed cash. This is because such option is a taxable transaction. This also means perpetual loss of your contribution room.
These asset items can provide you with the much needed relief until you are able to find a new job. It is important that you decide which asset item you are going to touch first. The rule of thumb is to go for the items which are not taxable or have the least cost. Obviously, you first relief will be your employment insurance. However, you may also have to start tapping your cash savings and TFSA. This three asset items are actually your first set of safety nets.
If these first three asset items are about to hit bottom, you may have to move on to your next asset item – your TFSA. It is at this point that you should have at least some job prospects. If not, then you may have to start looking at your unregistered investment portfolio and credit line. You may go for a credit line instead of liquidating your investment if the interest rates are low. The major downside of a credit line is that it adds to your monthly obligations. You will have to work on the numbers to determine whether you can afford additional cash outlay or not.
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Personal Finances FAQ:
Question: Has anyone used the new online personal finance software program MoneyDesktop?
Answer: I started using it a couple months ago. I’ve been rather impressed with it not only for its budgeting features but also for it tools to help me payoff my mortgage years sooner than I was going to be able to. Would I recommend it to someone? Sure, it has a 30 day free trial period, you don’t have to give any credit card info for the trial period either. If you don’t like it move on.
Question: Does anyone know the best personal finance book for teens?
Answer: Your Money, Day One: How to Start Right and End Rich by Michael J. Wagner is an excellent read for teens. It is available on Amazon or in Audio form on Audible.com or Itunes.
Question: I want to be better at managing my personal finances and investments – is there a course for this?
I have seen courses for business accounting but does anyone know of a course for personal finance?
Answer: I know lots of banks will offer free or cheap courses to learn how to manage money and whatnot so they can recruit people to their bank. You don’t have to join the bank when the course ends, so it doesn’t matter. Maybe contact your own bank or banks in your area about such courses.
Question: What is a good free personal finances tracker that doesn’t require Internet usage & account numbers/passwords?
Looking for something similar to microsoft money, however I am a mac user and am also very reluctant to give out account information online. I am perfectly willing to manually punch in every single transaction, I just need something with more functionality than a basic spreadsheet.
Answer: If you are an iPhone user, I am sure that the iPhone has some application that is able to do the personal finances function. Too bad you don’t like spreadsheets as I think spreadsheets are a great way to track your accounts as you can create your own database as well.
Question: I am looking for a bank to open an account for personal finances?
Particularly just a checking and savings account. Obviously I don’t want to pay any monthly fees or anything ridiculous like that. I’ll be earning about $800 a month starting in January and using direct deposit. I just want to find the best bank out there that won’t charge an arm and a leg for overdraft fees. I am aware of overdraft protection and will most likely sign up for that.
Answer: There is no best bank, best credit union, or best bank account. You need to look at the totality of the bank’s services, accounts, and fees. Every bank offers several accounts with different features and different fees. Some banks may have low overdraft fees, but high fees in other areas. Some accounts waive all fees if you maintain a minimum balance. Other accounts have a monthly fee, but no fee on each transaction. Other accounts have no monthly fee, but a fee for each transaction.
Some banks have a large number of ATMs which you can use without a charge. Other banks have a charge for ATMs.
I suggest that you visit several banks. Find out the features and charges of each of their accounts. Find out how many ATMs are available, and whether there is a service charge for using the ATM.
Make sure you get everything in writing. Do not accept anything the customer service person tells you verbally.
Question: What personal finance software is available for Mac?
I use a Mac at home and want to use a software to track my investments and personal spending. I do not want anything complicated.
Answer: iBank, Moneydance and Quicken for Mac all track investments and personal spending. There’s a new version of Moneydance 2010 which has just come out. iBank actually seems quite popular with Mac users
Question: What is a good alternative to microsoft money for managing personal finances?
Answer: Exactly, MS Excel – or any alternative to it – is more than enough for personal finances. If you want a ready software with templates for everything, then use a specialized personal finances management software, if you have some time available, and a bit of knowledge of Excel, you can setup a great template for personal finances management for yourself, without all those things that you don’t need in specialized programs.
Another software that is similar to Microsoft Money is Quicken. You can also use an online program like mint.com (which is free) to track your expenses.
Question: What personal finance lesson do you wish you had been taught by your parents or in school?
Personal finance was slightly taught to me by my parents or in school. I had to learn how to balance a checkbook, the dangers of credit cards and about saving all on my own.
Answer: I wish I could teach the world:
1. Don’t ever carry credit card balances; it ruins your credit
2. Don’t even think of leasing a car
3. Don’t ever rent furniture
4. Don’t ever buy a time share
5. Don’t even think of financing furniture; save up for things
6. Save to buy a car, as much as possible
7. Put 20% down on a house; even if you think your friends will make fun of you for having a small house
8. Put money away in a RRSP or savings investment; as much as possible
9. Become as self-insured as possible; stop making insurance companies rich
10. Always have 6 months worth of living expenses socked away