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More and more Canadians are feeling a sense of financial insecurity, with a looming recession making many of us worry about our family’s financial future. In fact, nearly half of Canadians fear negative impacts such as struggling to pay bills or losing income.
On top of that, rising gas prices and grocery costs are making it even harder to get ahead. It’s tough to fortify your family’s finances when you’re already pinching pennies, but there are steps you can take to ease the burden.
It’s important now more than ever to make sure your family’s family’s financial situation in a good spot. While the thought of a recession might be discouraging, it doesn’t have to eat away at your household budget if you plan right.
In this article, we’ll walk you through three steps you can take to make sure your family’s financial future is bright no matter which way the economy turns.
Manage Your Debts
The first step toward recession-proofing your family’s finances is figuring out where the vulnerabilities are, and for many, debt is the first thing that comes to mind. It’s easy to feel overwhelmed with debt, especially during economically uncertain times.
But if you’re worried about your family’s debt, you’re not alone. As of 2022, the average Canadian has $21,128 in debt, not including their mortgage. That’s a staggering amount for most families to bear.
To get started on managing your family’s debts, first list them all out, including the amount owed, interest rates, and minimum payments. Your debt list might include:
- Credit card debts
- Lines of credit
- Student loans
- Personal loans
- Outstanding taxes
- Car loans
- Mortgage
Next, it’s time to build a strategy. When it comes to managing your debts, it’s important to make a plan that’s sustainable for your family.
It’s tempting to want to wipe your debt out as quickly as possible, but you don’t want to eliminate your debt at the expense of your savings or day-to-day funds. Make sure you set a timeline that doesn’t stress your wallet too much, but also doesn’t let any interest on your loans get out of hand while you’re still paying them off.
You’ll then want to decide which debts to pay off first. It’s a good idea to focus on debts with the highest interest rates so you can reduce the amount of interest you’ll pay and cut the total amount down quicker.
You may also want to consider consolidating your debts. A debt consolidation loan is a loan you take to pay off your current debts, often at a lower interest rate. Of course, you’ll still be left with a loan to pay, but consolidating your debt will roll your current debts into one monthly payment instead, making it a lot easier to keep track of and less overwhelming.
Speak with your financial institution, as they might offer consolidation loans. That said, make sure to do your research if you choose this option, as there may be additional fees to consider, and it won’t address financial habits that may have led to the accumulation of debt in the first place.
Create an Emergency Fund
A looming recession can spell out financial uncertainty for your family, so it’s very important to have a cushion of savings ready in case of an emergency. Whether it’s unexpected home repairs or losing your job (hopefully not!), you don’t want your family to be scrambling in the event of a large, unexpected expense.
Having an emergency fund set up means you won’t have to immediately resort to credit if this happens, which will also help protect the debts you may be trying to pay off, too.
Here are a few steps you can take to build an emergency fund for your family:
1. Strategize
Just like tackling your debt, your plan for building an emergency fund should be unique to your family’s financial situation. Set an achievable goal that won’t cause too much additional stress to your budget, especially if you’re paying down debts at the same time.
One popular budgeting tip you can use to help you figure out what a reasonable saving goal is for your family is the 50/30/20 rule. This rule recommends that you split your income into three spending categories:
- 50% on needs
- 30% on wants
- 20% on savings
The exact breakdown might change depending on different factors like your housing costs or a change in income, but this tip is a great way to figure out what a realistic goal looks like.
2. Set up a separate savings account
Create a new savings account so that your emergency fund isn’t on the same card you use daily. You might also consider opening this new account with a bank you don’t do your every day banking with so that you’re less likely to dip into it before you really need it.
Also consider the type of savings account you open. High-interest savings accounts (HISAs) offer much higher interest rates than traditional savings accounts, meaning you can earn more on your deposited funds over time. This translates into faster progress towards your emergency fund.
Whatever you choose, make sure it’s an account you can access in case of an emergency, but isn’t so easy to access that you get in the habit of spending from it.
3. Make regular deposits
The best way to build your emergency fund is by making regular deposits, even if they’re small. That said, when you have little ones, it can be hard to stay on top of making consistent payments when you’re also managing the daily expenses of raising kids. If you think it might be difficult to remember to make deposits, try setting up auto-deposit so that you have one last thing on your recurring financial to-do list.
Many financial institutions will also allow you to automatically round up your daily transactions to the nearest dollar or transfer a specific amount of money per transaction to your savings account. This is a simple way to boost your savings without disrupting your budget too much.
Building an emergency fund is important in the best of times, but with a possible recession on the horizon, it’s a crucial step in making sure your family is ready for whatever comes your way.
Insure Your Family’s Future
You want the security you’re building for your family today to last through whatever tomorrow might bring. The loss of one parent’s income can be financially devastating when the economy is doing well, but during a potential economic downturn, it’s even more important to make sure your loved ones are protected, as getting back on their feet might be more difficult during a recession.
You have a few options when it comes to insuring your family, including:
Disability insurance: Disability insurance provides regular income while one can no longer work due to an illness or injury.
Critical illness insurance: This type of insurance provides a one-time tax-free payment upon diagnosis of a serious illness covered by the policy.
Life insurance: Life insurance provides a tax-free payout to the beneficiaries of the policyholder, such as your partner or children, if the policyholder were to pass away. This payout can be used to help with anything the beneficiaries need, such as final expenses, mortgage payments or even your child’s post-secondary tuition.
Life insurance has a reputation of being pricey. But if you’re worried about the cost of life insurance, it doesn’t have to be expensive. Most Canadian families only need term life insurance, which is typically much more affordable than whole life insurance. For example, a 40 year-old non-smoking man looking for $250k in coverage might expect to pay $205 per month with a whole life insurance policy, but only $27 a month with a term policy.
Like the name suggests, whole life insurance covers you for your whole life, but this popular option comes at the cost of high monthly premiums, making it a financial stretch for most families to fit into their budget, especially when money is already tight.
Term life insurance, on the other hand, covers you for an agreed-upon term length, meaning you have coverage for only the years you need it most. This might be when your children are young and financially dependent on you or while you still have a significant balance left on your mortgage.
If you’re a dad with young kids who will depend on your income for years to come, life insurance is an important step in making sure your family will stay on its feet after loss. With life insurance as part of your recession planning, you won’t have to worry about your hard financial work being undone if the unthinkable happens.
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While news of a looming recession can add more stress to your family’s finances, don’t panic! Building a financial plan to insulate against recession is possible, even on a budget, and you’ll have peace of mind knowing your family can weather economic uncertainty. Plus, there’s a chance that a recession won’t hit Canada at all, or it could be mild if it does.