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Preparing for Tough Times

January 19th, 2009 · 17 Comments

With economic conditions worsening, pink slips are flying thick and fast. Statistics Canada reported that more than 71,000 full-time jobs were lost in December and Finance Minister Jim Flaherty warned that Canadians were “in for a very difficult year”. January brought more bad news on the jobs front with Circuit City alone letting go 30,000 employees.

Assess your personal situation: How stable is your job and how likely it is that you might be let go? Take my personal situation. I work for a company whose fortunes ultimately depend on consumers spending hard-earned cash on electronic knick-knacks. It is not a recipe for stability at the best of times but with consumers tapped out, my odds of getting laid off are pretty high. My wife, on the other hand, works in the public sector and the odds of a job loss are very slim. In fact, even the possibility of a reduction in pay is quite remote. Many workers won’t be so lucky. Already, bonuses are hard to come by and at least one company has announced that it is cutting base pay for employees by 5% to 15%.

Figure out a worst-case scenario: How long can your household last on a lower, or indeed, no income? To find out, check your current expenses to see what can be cut out to run your household in survival mode. That should give you a good idea of how long your emergency savings and future income from severance payments (assuming your employer is in relatively good financial health), EI benefits (which are paid out after a 2 week waiting period) and other income (such as the income from a portfolio) will last.

Increase your rainy day funds: If you are uncomfortable with how long your household can survive on a reduced income, start stashing away more in your emergency savings account. The usual thumb rule is to have three to six months of expenses in an emergency fund but you may want to think about saving more by cutting back on discretionary spending. There is nothing like cash in the bank to provide the fortitude to survive tough economic conditions.

But, don’t avoid risk altogether: It is perhaps natural that appetite for risk is much lower when our pay checks are not safe and our portfolios are smaller. But if you are confident about your defence, don’t forget to go on the offence. Many, if not almost all asset classes are significantly cheaper than they were and while markets will remain as unpredictable as ever, the long-term return expectations are looking attractive.

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17 responses so far ↓

  • 1 Preparing for Tough Times « Defence Online // Jan 19, 2009 at 5:07 am

    [...] Read more here: Preparing for Tough Times [...]

  • 2 Nurseb911 // Jan 19, 2009 at 9:09 am

    Great article CC. Hopefully your employer’s situation improves and you won’t have to blog fulltime (not that any of your readers would mind) ;)

  • 3 Ben // Jan 19, 2009 at 9:21 am

    The rainy day fund should be on everyone’s mind right now. While in boom times there may be a case for relying on the line of credit as the rainy day fund, thereby putting the rainy day fund to work in theoretically higher return investments, this is not the time for that approach. Banks are scaling back credit to less credit-worthy recipients, and you don’t want to see access to you line of credit dry up the month before a job loss.

    The “what-if” worst case scenario is a valuable exercise as well. I’ve done it, and the result is reassuring enough to take some of the stress off. Knowledge is power here.

    Like CC says, in times like this it is tempting to avoid risk entirely and play the safe card 100%. I am continuing to put +/- 10% into a fairly aggessive set of RRSP index funds. As long as one has a fully funded rainy day account, one should never forget about the long-term view and the retirement that will come.

  • 4 brad // Jan 19, 2009 at 1:35 pm

    This may also be a good time to try selling things you don’t use or need anymore, and sock the proceeds into your emergency fund.

    People are looking for bargains and may be more open to buying things secondhand. I’ve been selling some of my books on Amazon, and I have a pile of old camping gear that I’m going to try to sell at the next Mountain Equipment Co-op members’ sale day in my city. None of these sales make much money individually, but together they add up. My biggest-ticket sale item (assuming I don’t chicken out and change my mind) is to get rid of my car. I don’t use it much anymore and am planning to put it up for sale this spring. There’s a Communauto station (like Zipcar) about a 10-minute walk from my house, the bus stops at the end of my street, and I live right on the bike path. All that should cover my transportation needs.

    It’s kind of silly for me to do these things since both of our jobs seem recession-proof and maybe even depression-proof, but I’m in the mood to lighten my load of “stuff” and figure I might as well try to make some money off some of it instead of donating everything to charities or taking it to the recycling centre.

  • 5 Canadian Capitalist // Jan 19, 2009 at 2:25 pm

    Brad: I somehow doubt blogging full-time will pay the bills. I’ll have to rethink my options if I do get laid off.

    Ben: I agree that it is best to rely on a rainy day fund instead of a line of credit, especially now that credit is hard to come by. Personally, I’ve decided not to increase our emergency funds but others may decide otherwise based on their situation.

    brad: Getting rid of “stuff” is on my list as well. We can’t get rid of the car, especially with a transit strike here but there is plenty of things to get rid of. It’s amazing how easily we accumulate stuff, even for thrifty folks like us.

  • 6 Sara Harmer // Jan 19, 2009 at 2:45 pm

    The company for which I work is advising employees of future cuts. When this will happen is anyone’s guess. The “heads up” from corporate has certainly given me the opportunity to pay off the outstanding consumer debt which has loomed over my family for too long. In 2 short months, I have paid off $3000 on my credit card and have budgeted my monthly expenses up until December. Although I am far from debt-free (line of credit & mortgage outstanding), I am proud and astonished at how quickly debt can be eliminated if you put your mind to it.
    Ways to save:
    - Limit groceries to $80/week (for family of 3). If you are creative you can do this.
    - Cancel your cable & internet (most of us have online access at work, so you can do online banking etc at work during your lunch break)
    -Establish your needs & your wants
    -Bring lunch to work, do not spend any extra money on food, drink or coffee
    Any extra money left over goes towards my outstanding debt. Now if I do get laid off I will have a little less debt to worry about

  • 7 chum // Jan 19, 2009 at 4:27 pm

    What do you guys hold in you emergency fund?
    For me and my family 6 months of expenses is a significant amount of money. I wouldn’t want to hold that kind of money in cash. The options I think are: cash, high interest savings, guaranteed investments, gold? What percentage in each?

  • 8 brad // Jan 19, 2009 at 4:53 pm

    @Chum: high-interest savings is my choice. You want to be able to access that cash fast, without penalty. That pretty well rules out most of the other options. The tax-free savings account is ideal, but the $5K limit means it’s going to take a few years to create a sizeable emergency fund.

  • 9 Canadian Capitalist // Jan 19, 2009 at 5:20 pm

    @chum: I keep about 3 months expenses in a high-interest savings account. I chose the lower end because we can survive indefinitely on one income. But if I was bringing in the only paycheck in the family and my job isn’t secure, I would seriously consider a much higher emergency savings even if cash is a terrible long term investment. Gold is too volatile to serve as a source of ready cash.

  • 10 Barry // Jan 19, 2009 at 5:24 pm

    Although I agree with the idea of stashing money for the bad times. I would also note this will not stimulate the economy. It is for this reason I think those who are talking about stimulous are dreaming if they think it will come from individual spending (i.e for example providing individual tax cuts at this time). Truth is stimulous of the type that is needed will only come from Gov spending at least in my opinion. Will be interesting to see the budget. I can only hope the gov does not spend away our future and our kids futures. Easy for me to say I guess given my job security. I just dread the idea of financing today with someone elses future.

    Also of interest is that it would seem I live nearby CC.

  • 11 EconStudent // Jan 19, 2009 at 8:11 pm

    Sara: I think internet is very important for me even though I can use it at school. I have internet/cell phone. I don’t have home phone or cable. The trick with my cell phone is that I have unlimited calling after 6pm and weekends. No need for home phone in my opinion. I use the Link phone card that charge half a cent for Canadian and US long distance and very very low rate for global calling.

  • 12 Phil S // Jan 19, 2009 at 10:01 pm

    How do you calculate 6 months of “rainy day” funds? Does this include or exclude the consideration of income from EI? If you include the consideration of EI income, I’d have more than enough in my rainy day fund to last 1 yr. If you exclude EI, then it would still be about 6 months or so…

    In terms of consumer spending, I’m actually quite contrarian as I didn’t spend a heck of a lot of money last year. So far this year, I’ve been spending as much as I make, practically.

  • 13 EconStudent // Jan 19, 2009 at 11:24 pm

    Phil S: Nice!!! Keep on spending so that Canada won’t enter a deflationary cycle.

  • 14 Four Pillars Investing // Jan 23, 2009 at 6:02 am

    [...] Capitalist wrote about preparing for tough times (ie layoffs [...]

  • 15 Free Online Backups and Weekend Reading | Million Dollar Journey // Jan 23, 2009 at 8:22 am

    [...] Canadian Capitalist has a timely list in preparing for tough times. [...]

  • 16 matt // Jan 23, 2009 at 2:59 pm

    CC, I am in a very similar boat as you. Wife’s job is recession proof, mine is not (electronics industry ahh) but we can survive indefinitely on one income. I feel pretty comfortable with just 2 months of emergency funds.

    These days I keep wondering if I should invest any savings in this highly volatile market or just keep it in a high interest account. Any thoughts?

  • 17 telly // Jan 27, 2009 at 2:19 pm

    Like CC & Matt, my husband and I can survive on one income indefinitely (although the RRSP contributions would be scaled back). Unfortunately, both of us work in the same volatile industry. :(

    Kind of fortunate & unfortunate at the same time, we had the opportunity to test this recently. In November I was laid off temporarily for 2 months. We discovered that we were able to live comfortably on my husband’s paycheque alone (he makes only slightly less than me), even during the typcially expensive Christmas season. Because the lay off was temporary, there was no severance but we were still able to sock away my unemployment cheques entirely.

    They went directly to the emergency fund account which isn’t quite at 3 months but now that I’m back at work…it’ll be there very soon. I’ve learned to “believe” in an Emergency Fund over the past few months!

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