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moneysense.ca, 7/10/08
Thinking about worst case scenarios
Take a Break wrote a great post on his worst-case scenario. With consensus opinion forming that a recession is looming, it is a useful exercise to think about how to survive a worst-case scenario:
- Is your job safe? I know that mine isn’t but my wife’s almost certainly is (she works for the Federal Government). If you were to lose your job, how long would you be able to survive before tapping into long-term savings? Don’t forget to include future income such as severance payments and Employment Insurance benefits in this calculation.
- Do you have an emergency fund? If so, how many months’ expenses can your emergency fund cover?
- Are there expenses in your household budget that you can cut? For instance, we won’t have daycare expenses if one of us isn’t working.
- Would you be able to tap into your portfolio? If things get very bad, you can always sell the bonds in the portfolio and consume dividend and interest payments instead of re-investing. Yes, that throws the asset allocation policy out of the window, but we are talking survival here.
- Would you be able to tap into your home equity? If you have a lot of equity in your primary residence, you may be able to re-mortgage your home or obtain a secured line of credit (it is best to establish one when you have a job) that you could tap into.
What is your worst-case scenario? How will you survive it?
moneysense.ca, 7/10/08
Thanks for drawing that post to my attention. I’m forunate that I’ve very secure in my current job with the massive nursing shortage & that I always have my BBA to fall back upon if need be. Even if unemployment were to rise significantly I don’t think I would adversely affected too badly since my living costs are low and I’m frugal to begin with.
That being said there are a lot of individuals out there in situations where hard lessons will be learnt. My generation specifically has had it very easy for our adult lives and those who extended themselves too far have a long way to fall.
My safety cushion for the next 10 years is my monthly spousal support payments. They are sufficient to cover a cost of food, shelter, transportation and utilities, so whatever happens I, hopefully, will not end up in a homeless shelter anytime soon..;)
Rita, what happens if your ex loses his job?
Venter:
well, then the Family Responsibility Office will go after his assets, and he has some, all right.
And if he loses his life, I have the first claim against his estate and/or his life insurance, whichever will be easier and quicker to collect..
Simple: Move my family to the hippie commune in Tofino, B.C. I can taste the wild mushroom and berry stew now!
Jon: That’s funny. Would the mushrooms happen to be of the ‘magic’ kind?
RITA:
It’s sad to know that there are actually people out there like you. I hope this post burns you in the end.
Canadian:
It’s scary right now and I find that most friends are out of touch with what’s happening. I’m cutting back on all my expenses and following the market news… a co-worker of mine is considering buying his first house. A 1/2 million dollar house that he needs his father to co-sign… I don’t get it.
Jim – though not the most tactful way of saying it, I agree with you – Rita you should take some responsiblity for living your own life independently.
On the actual topic, this is such an achilles heel for our family. My wife and I have jobs that range from 8/10 secure for me to 5/10 secure for her, a heavy 25 year mortgage of $395K and daycare costs of $1,600 a month. We have no consumer or tuition debt however. We record every penny we spend and track it against previous months. Most months we spend less than we make, but only barely and so have little cushion. Currently I’m torn between hoping for the best and continuing resp/rrsp contributions, or suspending them and using those funds to build up cash reserves. Not the best of options, but then again maybe not too bad for a pair of 30 somethings trying to hack in the big city.
Jim, you are very funny, and I absolutely do not blame you for your reaction, considering that you are a man…;)
But guess what, I only got what I was entitled to according to the law. Don’t like the law? Lobby the government so they would change it..
And good luck to you with that as there’s a very deeply entrenched bias against men in Canadian family courts at the moment, and it has been like that for a while now..Blame the feminists, I guess..:)
I am living it right now. You network like mad with everybody you know to find another job, quickly.
Stop ALL discretionary spending, and clamp down on outgoing funds, and make plans for short and long term.
I have enough money to buy a gun and lots of bullets, so if everything went to pot, I’m going on a Wall Street Safari and seeing if I can’t bag a few CEO’s
Seriously though I’ve got a whack of cash set aside in a savings account just waiting to go into the TFSA on January 1… that should buy me a few months at least if worst comes to worst.
Interesting post you linked to there, CC. That poster is in pretty good shape if s/he can keep going for 10-15 years.
We have three jobs between us, one union, so I would hope all three wouldn’t disappear at once. Plus I figure there’s about a dozen people who’d be laid off ahead of me at work. If worst really came to worst we can legally work on three continents so moving would be a possibility. We have 7-ish months of emergency fund, a bit more if we ditched subway passes and cable and cellphones, and stopped going to farmers markets. No pets or kids to support, no debt but the mortgage is a comfort too.
I’d also get some suggestions from my parents – they got through high-unemployment, 18%-mortgage-rate Ireland in the 70s and 80s with three children, so I can’t really complain
Worst Case Scenario – go back to farming. The problem – my land is several thousand miles away from where I live
Rita, first off your post annoyed me because your answer to the financial crisis was — my ex husband who I live off will pay my way–
Meanwhile, I am having sleepless nights trying to figure out weather to pull my money out and take the 40% hit or am I over reacting and just hang tight.
As novice said, what are YOU doing to empower yourself… besides coming onto a blog and bragging about your “safety cushion”? … please… go get a job.
It is interesting how times like this make everyone immediately consider if their job is safe or not. I think if you have yourself in a good financial situation (ie low debt/asset ratio) your worst case starts to look a little brighter.
Thanks for the mention CC. The motivation for writing that post was a combination of current market conditions and reading Tim Ferriss’ “The 4 Hour Work Week” where he talks about the ‘Defining The Nightmare’(p. 40), defining what could be the worst that could happen if you followed a specific path. In the book he is talking about exploring what might happen if as a business owner you were to step away from the business for some period of time. I think that he makes a good point about actually spelling out the worst case which often isn’t as bad as we imagine it to be.
Dear Jim,
I do have a job, a rather decently paying one. My support payments are indeed the safety cushion, not my primary source of income. As for my ex, what are they good for, those exes, if not for a financial support? I hope you don’t burst a blood vessel over this remark..
And if I may offer you a piece of advice – don’t pull your money out, just hang on tight and eventually the better days will be upon us. I don’t know how you can even consider taking a 40% hit, it’s insane..
I’ve been stockpiling cash for the past year and half, as far as my “new cash” is concerned. So I’m currently at about 45% in cash, NOW that some of the stocks and mutual funds that I haven’t sold are down between 20% and 50%. A lot of my cash is piled up in a high interest savings account, like some of the other posters, waiting to be contributed to a TFSA account or my RRSP contribution next year.
In a worst case scenario, if I had to break into the cash that I’ve got piled up waiting to go into a TFSA or RRSP and combine it with EI payments, I’m pretty sure I can survive for 2 full yrs. Mainly because I’m completely debt free, including zero mortgage.
As far as job security is concerned, I’ve NEVER had a safe, secure job. I worked in the consulting business for a while, which was very “feast or famine” and we can get laid off during any one of the “famine” periods which seemed to occur almost every business quarter regardless of the economy. So, I learned VERY early to always save a portion of every paycheque and put it into a “rainy day” fund and to never live beyond my means because I never knew when I would be suddenly out of a job. Even after I got out of consulting, I’ve always been in the manufacturing sector, which is constantly getting slaughtered – just by the natural forces of globalization, never mind an economic recession. The size of that rainy day fund that I have dips when I dip into it to make an RSP contribution or whatever, but it has always existed for me.
Hmmm, worst case scenarios is not a fun game to play…
1. My job relies primarily on natural resources for which demand seems to be about to enter at least a short-term slump, and my wife is in the financial world, which is having its own set of issues these days. It is too easy right now to imagine a morning where we are both greeted with pink slips.
2. My emergency fund would cover about 6 months. Definitely thinking hard about cutting back on the agressive mortgage payments to bank the extra money in the short term.
3. Not a lot of household expenses to cut significantly, but the GO train pass and the commuting gas would dry up ($500 total).
4. Our portfolios are all RRSP – hate to tap that, but could if I must.
5. We have an unsecured line of credit. There is quite a bit of home equity now, and could qualify for a secured line. What are the differences between a secured and unsecured line of credit? In difficult times, can the privileges to the unsecured line be revoked by the bank, etc? I looked online at PC, and seemed to come across a $100 application fee for the secured line, so dropped the pursuit. Having second thoughts now – any sages out there?
While worst-case scenarios have their uses, I advocate taking other proactive measures as well. Get in touch with your industry contacts – go for coffee. Make yourself more employable – submit that P.Eng application you’ve been putting off all summer (pointing at myself). Review all your monthly expense categories, and reduce. Forget about new curtains in the kitchen…the rest of you, keep buying and keep the economy afloat!
These are curious times in which we live.
While worst case scenarios are not fun…..neither are surprises that leave you bankrupt! You need to have a financial plan (yeah a real one) and update it annually. The part about having an emergency fund of 3 months income should cover about 6 months expenses. (OK maybe 6 years for Rita who married an annuity at some point).
The average time to find a similar job is one month for each $10k you earned according to the placement folks I know.
Like others, my job is safe…for now. Fortunately, my wife’s job is safer. Worst case is I get nabbed blogging all day when I should be working.
Jim, I think you should have a drink and rethink the idea of selling out for a 40% hit. It’s ugly out there, but time’s change. In the 25 years or so that I’ve been investing, we’ve had several major scares. This one may indeed be the worst, but it too will pass. I’ll take it all back if WWIII is declared, but until then, my plan is to continue selective buying in dividend paying stocks with steady cash flows.
Just over 5 years ago when I bought my house I was very concerned about what would happen, as a single income earner, if I lost my job. To calm my fears, I decided to take steps to make this inevtiable economic recession a win-win scenario for me.
Scenario 1 – Loose my job (not looking very likely, truth be told, but you never know)
Take a mid-life retirement, subidized by about 18 week of severance (9 years with same company) and 38 weeks of EI. Just read today that the EI working while on benifits program has been expanded to all economic regions, so everyone on EI in Canada can earn up to 40% of their benefits without their benit being reducted – With $435 weekly benefits plus $173 weekly income from a part time job, I’d have a gross weekly income of $608 and about $500 gross after tax, which is what I figure I would need to live on comfortably if I cut back on rrsps, savings, gym memberships, etc.
I have a fair bit of cash saved up and some additional cash in my rrsp account, an unsecured line of credit, no debt, except for my mortgage, and a fair bit of extra room in my buget that I can save during the severance period and am currently saving now, so I should be able to get by for quite a bit longer than the above mentioned 38 plus 18 weeks, especially if I am at least able to get some kind of employment.
I would spend some of my extra time doing low cost/skill, but time consuming upgrades to my home like painting, gardening, trim work and fixing up the basement.
Scenario 2 – Don’t loose my job (looking very unlikely, but you never know)
Use the extra money, to invest in bottomed out stock market, hire reputable contractors or out-of-work trades people to do some renovations on my house (likely at a more competitive price than in recent years, but, if not, at least they won’t be in a rush to get on to the next 10 jobs).
Buy some things that other people are selling off for cheap to pay bills (i.e, big sceen tv, nicer car).
Increase charitable donations to local charities like the food bank, Salvation Army, etc as I believe a bigger portion will go to people that really need it as opposed to people who are just working the system, as I have witnessed has often been the case in recent years.
Enjoy a much easier comute because of less cars on the road.
Pay off more of mortgage while interest rates or very low.
While I am grateful for my situation and that I have a fairly secure job a small part of me is kind of feeling like scenario 2 might be the worst case scenario for me
)
I decided that even if my job was okay for now, I knew, from others’ experience, that situations could change in an instant. And I couldn’t take the chance that I could be without an income. So, I decided to take more control of my life, rather than wait for the axe.
I had, many years ago, taken personal responsibility for my HEALTH and I decided it was time to take personal responsibility for my WEALTH as well.
I started looking at home-based business and waded through all the get-rich-quick schemes until I found one that I thought would fit the bill. And I lucked out!! The business opportunity I chose makes money – lots of it – and also saves me money – again lots of it.
I’m not getting rich quickly – don’t kid yourself, most people don’t have instant success. But I’m building my future and that’s what’s most important to me. I’m learning SO much and having loads of fun doing it. And although I work from my home, I interact with my “team” every day so I don’t work alone.
And, most importantly, I’m IN CONTROL of my financial future.
It’s not for everyone….but for me – WOW!
Jim: I’m not really sure what you mean by taking a 40% hit and pull my money out. If you had invested at the absolute peak of the TSX, you are down 34%. Most people invest slowly over many years and you are probably down a lot less that you imagine. Your comment suggests that you may not be as risk-tolerant as you thought, so think about increasing your allocation to fixed income.
Ben: Secured lines of credit are usually cheaper than unsecured lines. But like you said, there may be initial fees in establishing a SLOC and fees in closing it. Both types of loans are usually callable.
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It’s always worthwhile to think “worst-case scenario”, even if you’re really sure it won’t happen. I discovered this through harsh experience.
In the spring of 2007 I lost my job – a good, well-paying job that I believed was secure. I’m a health care professional and had worked for many years in a government-funded agency. I was in a senior position and a valued member of the team. The agency is unionized and I was a steward, so I knew my rights inside and out.
Then disaster struck. First I had to go on an extended sick leave. I had no sick days left so I used up my vacation time. I had a long-term disability plan but no short-term, so I had to go on EI sickness benefits, at less than half my salary, when my vacation time ran out. Then the LTD plan denied my claim. My husband’s job (which he hated) paid the mortgage but not our other living expenses. We did have a healthy emergency fund, but it was all gone by the time I was able to return to work. When I tried to go back, my employer fired me, without notice or just cause.
My claim for regular EI benefits was denied because I was fired. I appealed but the hearing did not take place for another 4 months. There were no other openings in my field within a reasonable driving distance. I grieved wrongful dismissal and eventually got a good settlement, but it took almost nine months from the date of termination to reach an agreement, complete all the paperwork and release the money to me. And to make matters just about as bad as they could be, my husband decided to leave his job – without any prospects – two months after I lost mine.
How did we survive? Optimism, openness to opportunity, and networks.
First, with no prospects, I decided to use some of my free time to volunteer at a local non-profit agency. I had just started volunteering there when a position came open unexpectedly. A former coworker’s husband, who was on the board of directors, recommended me for it. It was not in my field, but I could adapt to it; it was very low-paying compared to my former salary, but it would tide me over. And it was a seasonal job, so I’d be free to pursue other opportunities in a few months. I took it and had a blast – and made some good new connections which have already served me well. I continue to be involved with that agency on a volunteer basis.
My husband was recruited by a local company for which he’d previously done some contract work, the day after he left his job. The new job is much better paying and much better suited to his interests and abilities. Again – the network in action.
Meanwhile, colleagues in my profession in other agencies were looking out for me. One gave me a reference, a real boon when I couldn’t use my former employer. They notified me of opportunities arising and I eventually got a temporary position in my own profession. That strengthened ties with those colleagues and again made me more connections.
Now I’m going into business for myself. I’m concerned about the timing given the global economic crisis. But between my husband’s job and my second temporary job, we’ve built up a good safety cushion again. I used my settlement money to pay down part of my mortgage, and used the equity in our home to establish a secured line of credit. Our mortgage is our only debt; I haven’t touched the LOC yet but it’s good to have it there, both in case I need it, and to take advantage of opportunities quickly. My husband’s job looks secure (though we’re considering contigency plans if it disappears too). My network continues to function as I’ve already had several referrals and leads from my colleagues. Things might get tough again, but I’m confident we can make it.
So like Big Cajun Man (whose story I’ve been following – best wishes to you, Bro), I’ve lived this. And I can testify to the benefit of all the advice that I’ve read on this and other blogs – build an emergency fund; minimize your debt; be prepared for the worst, even if you think it could never happen to you; and very important – build a network of support and good will, long before you might need it!
Hope: Thanks for your inspiring comment. Whatever the situation, we can get through it. I’ve been laid off and though it might be difficult, it is best to be optimistic.
What are eveyone’s thoughts on aggressive paying down the mortgaget? This may be more of a strategy when things improve but is geared towards reducing your exposure to a downturn in the economy and any potential periods of unemployment.
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EI has denied my husbands claim, because he quit his job in ns to move to bc for better work and to reconnect with his mother that he has not seen for 18 years. They told us because he did not secure his job here before he left his job in ns, is the reason behind it, even though the job he did have here was fulltime. He was just short ended because the employer didnt have the hours to keep him and he was the newest. We have a young son, and no wheres to really turn to, as his mom was in an accident and is waiting foir ei too. It is Christmas, and rent is going to be due. I find that there is no organizations out there to help. Welfare just tells him to go get a job, although he has been trying since he got laid off, as have i, but there isnt any work and there no other organizations that will help with rent.
Lost and stressed out.
Julie
Rita, women like you give women everywhere a bad name. Feminism gave you the right and the RESPONSIBILITY to be self-sufficient. If my daughter turned out like you, I would be deeply ashamed of her.
How dare you treat your ex husband as a personal pension plan! It is sickening that the Canadian courts are currently pandering to the wants of vitriolic, selfish bitter old women like yourself…..just because the law is overcompensating, is no excuse for you to trill victoriously with your check in hand, all the way to the bank.
Grow up, get a job, and support yourself. I hope your ex does lose his job, if only so that you will be forced to examine the self-satisfaction thats seeps through your postings like cats on cream.
You don’t deserve a penny of what you are getting, and I say that regardless of your personal circumstances. Nothing justifies your attitude and expectation, nothing.