This post was sponsored by HSBC Bank Canada.
With the current coronavirus crisis, it’s fair to say that most Canucks are stressed about money right now.
A recent poll found that 52% of Canadians say they have worried “frequently” or “occasionally” about the safety of their savings in the past month. With interest rates falling and stock market volatility, it has become even more challenging to ensure that inflation doesn’t erode your savings while we’re all waiting out this crisis.
You could sock it away in long-term investments, but in such uncertain times, you’ll want easy access to some of your money for emergencies. Experts suggest setting aside 20% of your after-tax income for savings and debt, and now is prime time to stash your cash somewhere safe. Also, since we’re all staying home right now, some Canadians are finding unexpected “COVID savings” lingering in their bank accounts. But what should you do with that chunk of change? This article looks at what to do with your savings during COVID-19.
Start an Emergency Fund
If there’s one thing we’ve learned from the coronavirus crisis, it’s the value of having an emergency fund for unexpected expenses.
Ideally, you should have 3-6 months of expenses saved. For example, if your “needs” (rent/mortgage, groceries, essential bills) cost roughly $2,000/month, aim to save between $6,000 to $12,000 in a “911 fund.” That’s a challenge at any time (and even more so now), but with the current job market, it’s never been more important. If you’re employed right now, you should be savings towards this kind of buffer.
The best thing to do is to put your savings into a high-interest savings account (HISA). Look for offerings that give you greater than 2% interest (to keep up with inflation), charge no monthly account fees, and require no minimum balance.
A savvy strategy is to automate your savings – which means setting up a regular, ongoing deposit into your savings account. It’s a way of ensuring that you pay yourself first, as well as stick to a budget.
Invest in GICs
If you’re sitting on some money, think about locking your savings in a Guaranteed Investment Certificate (GIC) – a type of investment that pays you a guaranteed interest rate. Sometimes referred to as term deposits, GICs are like savings accounts with a padlock: you deposit the money into an account and get an annual interest rate. But unlike a savings account, your investment is usually “locked-in” for a set period.
GICs are about as safe as you can get, generally offer inflation-beating interest rates, and can be held in both registered (RRSP, TFSA, RESP) and non-registered accounts.
What also great is that GICs offer variable, flexible terms to suit your financial goals and circumstances. You can buy them for as little as 30 days and as long as five years, and market-linked GICs are an option too. Interest rates vary by product and term, but you may want to start with a shorter-term investment to see how all this plays out. Read more about The Best GIC Rates in Canada.
If your situation is uncertain, you could ladder your investments in different types of GICs or for different terms. HSBC offers redeemable and non-redeemable GICs in terms ranging from 30 days to 1-year. The redeemable GICs allow you to cash them out (without any interest payable) any time in the first 89 days if your situation changes or with prorated interest from 90th day. Non-redeemable GICs pay a higher rate of interest but cannot be redeemed before maturity. These are a great option to earn extra interest especially if you want to set aside some money and have the peace of mind that your principal is protected while you earn interest. You can also hold redeemable GICs in your TFSA if you expect to make enough interest for a tax-free account to be attractive.
Don’t “Panic-Sell” Your Investments
If you’re one of the 50% of Canadians who reported being “concerned” about their investments in the past month, take a deep breath and remember: now may be the time to start investing while the “markets are down”. In fact, starting early and investing long-term may increase the likelihood of benefiting from this market downturn so long as investors stick to the “buy and hold” investing strategy.
Though the urge will be great, don’t “panic-sell” your investments. Timing the market isn’t an effective strategy, and emotional investors usually end up buying high and selling low. Market volatility is normal, and though it may take time, those numbers will start to climb again someday. This too shall pass!
If you are thinking of investing some of your savings, your best defence against market volatility is to build a risk-appropriate, diversified investment portfolio. With a robo advisor like HSBC Wealth CompassTM 1 , you can receive an investment recommendation and start investing online in a diversified fund2 that holds a variety of exchange-traded funds (ETF)s to suit your financial circumstances and risk tolerance. Setting up automatic contributions to your account can help smooth out market ups and downs and take emotions out of investing.
Start a “Fun” Fund
Have you heard of the 50/30/20 rule? If you follow that budget, 30% of your after-tax income is meant to be set aside for fun, or what the rule-makers sometimes call “wants.”
No one is having much fun right now, but there’s a light at the end of this tunnel. Having a little money socked away to enjoy in the brave new world on the other side is a good idea. Once this crisis is over, all those non-essential stores will be motivated to clear out ageing inventories, and you’ll want to be there, debit card fully charged, to take advantage of what could be the best sale season of the decade.
There’s a practical side to this fun-fund too: by setting aside a chunk of money for these wants, it also gives you something to look forward to later. Maybe you’re saving for that vacation to a dream destination, a wedding that you had to postpone or to give your home a makeover (especially after months of hibernating in it).
Whatever your financial goals, open a separate high-interest savings account to house your “fun” funds. Even $50 a month adds up over time and gives you some “pleasure money” to spend once life gets back to normal.
Whether you’re in a holding pattern now or working harder than ever from the front lines (thanks guys!), spreading out your savings will help ensure that you’re in a good place once the coronavirus crisis is over. It’s also a smart, life-long habit to adopt and you’ll reap the rewards later on if you consistently set aside a little money each month to boost your savings and investments.
Remember your first priority should always be debt repayment. No investment is likely to pay you as much as you’ll save on interest. But you can do this while also creating a cushion. It’s all about achieving balance – having a mix of cash for emergencies, as well as a chunk of change towards savings and investments for the short and long term. Times are tough, but when it comes to securing your financial future, you’ve got to be tougher.
1™ HSBC Wealth Compass is a trade-mark of HSBC Group Management Services Limited used under license by HSBC Investment Funds (Canada) Inc. (“HIFC”).
2 HSBC Investment Funds (Canada) Inc. (“HIFC”) is a direct subsidiary of HSBC Global Asset Management (Canada) Limited (“AMCA”) and an indirect subsidiary of HSBC Bank Canada, and provides its services in all provinces of Canada except Prince Edward Island. AMCA is a wholly owned subsidiary of, but separate entity from, HSBC Bank Canada.
AMCA is the manager and primary investment advisor for the HSBC Mutual Funds. HIFC is the principal distributor of the HSBC Mutual Funds. HSBC Mutual Funds are also distributed through authorized dealers. Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus and Fund Facts before investing. Except as otherwise noted, the indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemptions, distributions or optional charges or income taxes payable by any unit holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any compounded rates of returns are used only to illustrate the effects of the compound growth rate and are not intended to reflect the future values of the HSBC Mutual Funds or returns on investment.