Written by Robin Taub
Thursday, November 19th, 2020
We're living in a world of uncertainty brought on by the COVID-19 pandemic, and we're all experiencing it in different ways. While some of us have enough money to cover our outflows, others are having trouble making ends meet, even after taking steps to minimize expenses.
If You're Struggling, How Can You Access Money in these Difficult Times?
The first and best source of cash is an emergency fund, typically 3-6 months of expenses set aside in a separate savings account. If you have an emergency fund, now may be the time to tap into it, knowing you can replenish it down the road.
However, due to the combination of high levels of household debt, easy access to lines of credit and very low rates of interest on savings accounts, one third of Canadians don't have an emergency fund.1
If you don't have emergency savings, there are other ways to access money in desperate times, with pros and cons associated with each:
- If you were saving towards a vacation or another specific goal that's been postponed for the foreseeable future, use the available cash from your vacation (or other) fund on immediate needs and rebuild the fund in the future.
- You could apply for government support, such as Employment Insurance (EI), among other programs.
- If you borrow money from family members or friends, there can be pitfalls. If not managed well, this can lead to difficulties and awkwardness in the relationship, so try to agree on terms that everyone can live with and then stick to the repayment plan.
- Have you requested refunds for postponed or cancelled events or programs? Refunds are not necessarily automatic, so you may have to request yours formally.
- If you sell liquid investments, meaning securities that can be immediately sold for cash, held in your personal non-registered investment account, bear in mind that selling may trigger capital losses or gains. Examples include money market funds, publicly traded stocks and bonds, mutual funds and exchange traded funds (ETFs).
- If you have funds in a Tax-Free Savings Account (TFSA) you can withdraw from, you won't pay any tax when the funds are withdrawn. Since TFSAs were designed to be flexible, you can re-contribute the amounts withdrawn in the following year, in addition to the annual maximum, to get back on track. However, depending on what you sell, you may be locking in losses.
- Depending on the circumstances, you may be able to cash in a Guaranteed Investment Certificate (GIC) Since a regular GIC can't be cashed in or redeemed before the maturity date, you may have to demonstrate financial hardship. Even then, redemption is at the discretion of the issuing institution, who will likely charge you a fee or penalty. Also, even if you only need some of the money, you may have to take it all out and you may lose some or all of the accrued interest.
- If you qualify for a line of credit (or personal loan), the interest rate will typically be lower than on a credit card, and you only pay interest or make payments on a line of credit if you use it. However, you're still taking on debt, so you'll want to make sure you can repay it within a reasonable period of time.
- A home equity line of credit allows you to borrow against the equity you've built in your home at a relatively low interest rate. You can draw funds as needed, pay if off and then use it again without reapplying. A home equity loan is a fixed lump sum you borrow, with a fixed repayment schedule of both principal and interest. Keep in mind that in the current economic environment, credit availability is tightening and it may become more difficult to qualify or refinance in the future. Plus, it bears repeating that when taking on any debt, you do need a plan to repay it within a reasonable time.
Know the Consequences
- If you're considering withdrawing funds from your Retirement Savings Plan (RSP), keep in mind the downsides. By selling, you may be locking in losses and there are tax consequences when you take these amounts into income. A withholding tax of between 10% and 30% is applied to your withdrawal, but ultimately, the tax you pay will depend on your personal tax situation and could be more (or less) than the amount withheld. Furthermore, you can't re-contribute amounts you've withdrawn.
- Use credit cards responsibly. High interest rates mean the balance owing will grow significantly if you can only make the minimum payment.
- Finally, be aware of the dangers of payday loans, which aren't a recommended way to borrow funds because of the high rates of interest.