It's Your Money  

What to do with extra cash from COVID-19 savings

COVID cash conundrum

While many Canadians have faced financial hardships during the pandemic, there are many others who have amassed considerable savings during this same period.

Less travel, dining out and a whole host of pandemic related benefits have left many households with a lot more savings than they are used to. A report that was released at the end of last year suggested that $170 billion in excess cash has been accumulated by Canadian households and businesses throughout COVID-19.

So now that things are opening up again, what should you do with this cash if you’re one of the ones who’s been stockpiling it?

While a few big splurges might sound nice, now is the time to focus on major financial priorities instead. But which priority should take precedence? Should you pay down your mortgage, other debts, or focus on accelerating your retirement savings?

There is no one right or wrong answer here since everyone’s financial situation is unique.

For some, paying down the mortgage or other debts should be the top priority. These ultra-low interest rates won’t last forever and knocking down your capital owing now will mean that all future mortgage payments will be go more directly against the principal instead of to interest.

If you have any “high interest” debt such as a balance owing on a credit card accumulating double-digit interest rates, it is quite likely that this should be the No. 1 place to pay down.

For others though, it might make sense to let your debt level remain steady and to kickstart or increase your retirement savings. If you’re not taking full advantage of tax preferred programs like RRSPs or TFSAs and not maximizing any employer provided matching programs, putting your excess cash here might put you farther ahead.

And for some, the money might be best allocated to an emergency fund if you don’t have one already. Something that contains around six months’ worth of living expenses and is held in something completely safe yet still earning a little bit of interest each year.

The only way to know for sure is to run these different scenarios through a full financial plan. Not a one or two-page illustration that shows how much growth you might get in your investment accounts but a detailed plan that will run your options through a wide array of variables such as interest rate and inflation spikes, market crashes and different life expectancies.

Going through this process will give you a clear plan of where to best deploy your saved up cash and how to make the most benefit from all that we’ve been through over the past 18 months.

How to make more money

You may have some ambitious plans for building your retirement nest egg, making a big purchase such as a second home or doing some ambitious travel. Conventional wisdom says in order to sock away more money, you need to cut back your expenses.

While that is certainly true and will help, there’s the other option we often forget when we have an established career – you can make more money.

If you are already working hard, that might seem tricky. But there are some fairly easy ways to bump up your pay. Here are some ideas on how to do it:

Negotiate a raise – If you want to make more money in your current job, ask for it – you may be pleasantly surprised. However, you need to be prepared before you request a raise. Have a specific amount going in and base your request on research by finding out what others in your field are paid and what accomplishments you have had.

Quit your job – One nearly surefire way to get a salary boost is to switch jobs. According to a Wharton School study, you can get an 18 to 20 per cent increase in pay by taking a new job, versus what you’d get through an internal promotion. Switching jobs can be a good way to increase your salary, but make sure that you plan this carefully, so you don’t find yourself un-employed.

The best way to land that lucrative new gig is to tap your network outside your current workplace. One study found that employee referrals generate 40 per cent of new hires.

Upgrade your skills – Professional development can lead to new skills or give you a piece of paper to confirm your excellence in existing ones – both might lead to a pay hike over time. Some new certifications can take years to complete, but many employers help foot the bill. Also, consider taking management and leadership courses.

Get connected – Joining an industry organization can get you access to those professional development opportunities and connect you to networking events that could lead to a new, better-paying job. Volunteering with a professional group, meanwhile, looks great on a resume and can help develop new hard and soft skills.

Learn another language – Being multilingual will increase your earning power by an average of two per cent, depending on the language you learn. That may not sound like a lot, but over the long term, factoring in compound interest, that one-time raise could add up to six figures over a lifetime. As a bonus, such skills can lead to on-the-job travel.

When you earn more, you can do more with your money. So it’s a good idea to make earning more part of your financial plan. Plans to up your salary may not be as predictable as cutting expenses. You may be qualified for a new, higher paying job, but it may not come along at the perfect time. But long-term career thinking should lead to more dollars down the road.

Restarting after a divorce

Separation and divorce are painful and exhausting – and also expensive. After a marriage ends, you need to restart your life with separate finances and a new financial plan for moving forward.

When you start again, it’s not from zero, but it can feel that way sometimes. You are often working with fewer resources, which is tough, and things that once seemed simple are now complex. But until you press reset on your income, savings and long-term financial planning strategies, you can’t really move on.

Here are some ideas for restarting your finances after a marriage ends.

Firstly, the best way to restart is to ... start. I have seen clients who are paralyzed by their situation.

Once you’ve made the decision to separate, be honest with yourself and recognize it’s time to move forward. Take charge of your new life right away, otherwise you’ll put your financial self in jeopardy.

You can begin by separating your finances. Cancel automatic deposits to joint accounts and credit cards where your spouse is a secondary card holder and open new accounts and credit cards in your name.

As well, if you changed your name but are now changing it back, start updating your identification right away. If you have younger children, make sure the paperwork at their school and summer camps has been updated with new phone numbers and email addresses, too.

Once you have a separation agreement and it’s been decided who gets and pays for what, start removing names from the ownership of properties and vehicles. The partner who has moved should issue change of address cards.

That’s easier said than done though; some of these changes can be emotional. Perhaps you’ve agreed to give up the family cottage or sell off a beloved vintage sports car. Putting those assets in another person’s name can be difficult. But no matter how hard, it needs to be done right away.

It’s likely that for the last few years you’ve been budgeting using two incomes. Now you’re spending and saving with just one. You may need to reassess your lifestyle and spending habits.

Create a new budget for yourself. You may, at least in the short term, have to cut back on certain expenses like pricey meals out with friends or mid-winter vacations.

Work with your financial planning professional on creating a new financial plan. You may have to come up with a new timeline for retirement – you may have to work longer than expected now – or come up with new assumptions around pension plan payouts or RRSP savings.

You may no longer be receiving survivor benefits from your former spouse’s pension plan or that your medical benefits have been reduced or eliminated. You may need to setup new health and disability insurance for yourself too.

Also, update your will and the beneficiaries on your retirement accounts and life insurance policies. In many cases, the recommended beneficiary designation after a separation will be to “estate,” but you should confirm this with your advisors.

Restarting your life after divorce is difficult, but it also brings with it new hope for your future. You will get through this – and when you do, by taking the right steps, you may find yourself in a better place, both personally and financially.

Seek out the guidance of a Certified Financial Planner (CFP) professional to guide you through this process. Ideally, find one that also holds the Chartered Financial Divorce Specialist (CFDS) designation as well. If you need to reach out to someone who holds both designations, feel free to send me an email and I can make an introduction.

Working from wherever

Almost one and a half years after working from home became a thing, many employers have embraced an environment where employees can continue to work from home as things reopen.

With this opportunity to work from home, some Canadians are looking at other places besides their primary residence to set up shop. For some that means working from the cottage in a different province and for others, even working from a foreign location.

But before you switch from working from home to a location outside of your province or country, there are a few things that you should consider:

1. Understand what your employer expects, and the various tax and workplace laws they are subject to – Employers may restrict an employee’s ability to work from anywhere for a number of reasons:

  • Employees could face significant quarantine restrictions upon returning to Canada leaving them unable to return to work on short notice.
  • The location of the employee’s work could have an impact on whether the employer has a permanent establishment in another jurisdiction which could require the employer to pay taxes there. A corporation will be required to pay tax in the jurisdiction where they have a permanent establishment which focuses on where the corporation has a fixed place of business or where an employee has the general authority to enter contracts on behalf of the employer.
  • The employer will also need to consider whether the location of the employee’s home office affects the employer’s obligation to withhold source deductions and remit these to the foreign government.
  • Where the employee works could affect what workplace health and safety laws apply, which employment standards laws apply, whether the employee has the right licence to perform the work and whether the employment benefits provide coverage for the employee.

2. Personal tax implications of working in another province – Canadian residents are subject to tax in the province where they reside on Dec. 31. To determine residency, the Canada Revenue Agency (CRA) considers the availability of a dwelling place, the location of the taxpayer’s spouse and dependents as the most significant residential ties. Also considered are secondary ties, such as where you have health coverage, a driver’s licence, where you bank and where you have club memberships.

If you establish residential ties in another province where the tax rates are higher, you may find that not enough tax was withheld from your pay resulting in an unexpected tax bill at the end of the year.

3. Spending time abroad could mean you are considered a resident for tax purposes in that other country – If the country where you are spending time has a tax treaty with Canada, double tax can generally be avoided. The country where the income is sourced collects tax first and the higher tax rate between the two countries would prevail.

A Canadian employee who spends more than 122 days in the U.S. for three consecutive years or 183 days in the U.S. in a given year, may find that they have to report their worldwide income on a U.S. tax return and file complex information returns to report their non-U.S. investments.

It is not possible to temporarily work in another jurisdiction and avoid paying Canadian income tax. If you permanently sever your ties with Canada but still receive remuneration from a Canadian resident employer, you could still be subject to tax in Canada or you may have to rely on a tax treaty between Canada and the country where you now live to avoid Canadian tax.

4. Permit or visa requirements while working abroad – To be able to carry out remote work outside of Canada, you may need a permit or a visa that allows you to do so. Before leaving Canada, determine what type of permit or visa is required and the rights and limitations that come with such a permit or visa. The immigration rules vary by country and without the proper documents, you may not be able to secure accommodations, travel in and out of the country, bring family members with you or open bank accounts.

5. Health care and benefits coverage – Before relocating, find out whether your existing health care coverage will cover expenses incurred while abroad. Coverage abroad may not be sufficient, and you may have to purchase additional coverage or specific coverage for the country where you are spending time.

With the increased freedom to choose where you work, remember to compare the advantages and disadvantages of working from various locations. While a new locale might positively impact your productivity and even your quality of life, you might also encounter unanticipated difficulties that make work less enjoyable.

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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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