Economic downturns and unforeseen life changes often spotlight the importance of good financial planning. Maybe you’re grateful you put the time in. Maybe you’re kicking yourself for putting it off.
Planning well today will prevent panic tomorrow. With these insights from CWB’s Samuel Chinniah and Samuel Cummings, you can build up your personal finance fundamentals and learn what to do when cash flow gets tight.
Samuel Chinniah is a Senior-Vice President in CWB Wealth’s Toronto office. Working with executives and high-net-worth families, he provides comprehensive wealth management solutions, including aligning advanced planning to his clients’ lifestyle needs. His expertise also includes wealth management, tax and estate planning and retirement preparation.
Samuel Cummings is Vice-President and Market Lead for CWB’s GTA West District in Ontario. With more than 17 years’ experience in financial services, he complements his commercial banking expertise with wealth advisory, financial investment and retirement planning acumen.
What can Canadian families do to mitigate the impacts of inflation?
Chinniah: Inflation takes a bite out of discretionary cash flow and families can certainly feel the pinch when economic times are tough.
Keeping in mind that cash is king, I recommend taking these proactive steps:
- Have an emergency savings fund in case of job losses or unexpected expenses.
- Know which expenses you can cut back if needed.
- Build up your credit reserves.
Consider applying for a line of credit that you can use if you need it. Do it when your credit score is good, not when it’s taken a dive. This could also include a home equity line of credit. If you need cash quickly, you can’t count on selling your home or a hard asset at a moment’s notice.
Work with your financial advisor to ensure you have the cash flow to maintain your lifestyle. They’ll help you look at your budget and identify ways to save money. Regularly review the plan with your advisor to ensure you have some wiggle room.
Cummings: A prudent financial plan will take into account two to three per cent inflation. Build that assumption directly into your financial plan and ask, “What would happen if inflation remained at greater than three per cent? How would that affect your plan in the short, medium, and long term?”
Let me give you a scenario: We typically frame goals around a decision or milestone – so, let’s use the age of retirement. What would it take to retire at 55? What would extend that timeline to 60? Maybe you’ll need to work longer, or maybe you’ll just need to work part-time for a defined period. The market is always going to impact how we think about the future. Working with a financial advisor ensures your plan accounts for that.
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Say I’m a homeowner in a variable-rate mortgage and my renewal is coming up soon. What advice do you have for me?
Chinniah: A lot of homeowners are in this situation. Not so long ago, you could get a variable rate for as low as 1 per cent. Mortgage payments these days are taking a bigger bite out of a homeowner’s monthly budget. If your renewal’s coming up, consider the short-term option – like a 6-month or 1-year term.
Cummings: Extending amortization is another approach a family may want to consider if they’re looking to free up cash. While interest rates probably won’t go back to pre-pandemic levels, it’s very likely they’ll come down in the short- to medium-term. Some of our clients are five, 10 or 15 years into a mortgage. They’re coming up on a renewal and interest rates are significantly higher than they were in the previous mortgage. To offset that higher payment, we’ll discuss what it looks like to extend the amortization. It's not for everyone, but it’s a consideration for clients who have the flexibility. This may mean increasing the amortization for the short-term length that Samuel Chinniah spoke about. Upon renewal or maturity, we can then look at bringing the amortization back down again.
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Let’s talk best practices for managing personal finances. What should people be doing?
Chinniah: Good financial management should be a constant regardless of the economic climate.
My advice would be:
- Have a good financial plan with up-to-date budgets and cash flow projections to help navigate challenging economic times.
- Frequently monitor what's coming in and out of your accounts. Adjust the timing of your expenses where you can.
- Regularly review and adjust your budgets and forecasts. Manage your liquidity needs by putting credit lines in place ahead of time.
- Seek advice from your financial advisor or relationship manager. We’re always here to assist you.
Cummings: That’s good advice from Mr. Chinniah. Mine is: Never assume small changes in your circumstances mean you don’t need advice. Changes to your financial situation, to your debts, your liquidity, your leverage...they’re all impactful, so don’t discount them. They should be a catalyst for conversations not just with your banker, but also the whole team of professionals you surround yourself with – like your lawyer, accountant, and financial planner. It’s crucial to have regular touchpoints with them.
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How can a CWB relationship manager or advisor help me better manage my personal finances?
Chinniah: To start, we’d work out a financial plan for you and then go through your current budget, reviewing each item. We’d look at your cash flows and income sources, and then we’d create a new, comfortable budget with enough surplus and flexibility. Working with an advisor makes sense because every individual is different – and the plan should match your circumstances.
How often should someone review their financial plan?
Chinniah: At minimum, I ask my clients to meet once per year. If the plan is more complex, or there are ongoing issues or situations that require more frequent review, then we’ll meet quarterly or bi-annually to ensure we can take timely action if needed.
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For someone who’s recently received some capital gains or liquid capital – such as from an inheritance or selling an asset – should they invest it or use it to pay down their debt?
Chinniah: Typically, we’d start with looking at your debts – is it good debt (tax-deductible) or bad debt (non-deductible) – and the interest rates you’re paying. If it’s non-deductible debt, I’d usually advise to pay it off first. We’d also prioritize higher-interest-rate debts and then work towards debts that have a lower interest rate. Something else we’d explore is consolidating debts – for example, a home equity line of credit and a collateral-based debt – if it meant we could get you a lower interest rate.
Of course, we also need to look at what your return could be if you invested this cash and how that return compares to the cost of carrying the debt. In some cases, you might be better off investing your windfall in the market than focusing solely on paying down your personal debts.
If paying off your debt means facing a significant penalty, we’d look to park the funds in short-term, high-interest accounts. Many of these accounts have strong rates of return right now.
In the case of no debt, we’d put the money into an investment portfolio. Since at this time we really don’t know where the market is heading, we might invest one-third over 30 days, another third over 60 days, and the last third over 90 days. This would lessen the impact of market timing or market declines over the short-term.