Use Covid savings effectively

man with tie holding a piggy bank

Savings from Covid? Yes, for some!

Statistics Canada says Canadian households saved 12.7 per cent of their net income in the fourth quarter in 2020, up from just two per cent at the end of 2019.

For some of us, Covid has not been a total disaster financially. Working from home, or in an industry that has not been affected by the pandemic, has led to more savings. 

A Scotiabank study indicates the majority of Canadians are being more cautious with their money, with 58 per cent of respondents putting extra money away and 38 per cent contributing to investments.

So what to do with those savings?

Pay down debt

Credit cards, although convenient and useful, are the vampires of the lending industry. Before Covid, an average 44% of credit card users didn't pay their balances off monthly according to one source. So pay off your cards if you can. 

Rather than paying off the highest interest card or the highest balance card, try starting off with the lowest balance card. Paying that off will give you emotional momentum to keep going on the other cards - the snowball effect. For more information on that, see The Total Money Makeover by Dave Ramsey.

Create an Emergency Fund

Contributing to a TFSA is a great way to accomplish several things at the same time. You have an investment that is harder to get at than just a bank account, so you will think twice before withdrawing. You also have liquidity, that is, you can withdraw it at any time and replace it later. However, if you are making an emergency fund, you want to make sure that the underlying investments are secure. That may mean very little return on your funds these days.

An alternative emergency fund is to have an unused line of credit. If you haven't drawn on it, it's not costing you anything. But it is there if you need it. Of course, it will mean having to repay more debt later. But it might make more sense than having money sitting around in a bank account.

Contribute to Investments

For those early in their career, saving for a home down payment can be a strong incentive. RRSPs can be used for this, since you can now withdraw $35,000 from your RRSP and then repay it over 15 years. Of course using your TFSA is also an option if you aren't thinking about retirement yet.

In other cases, topping up your RRSP can be a no-brainer, especially if you are in a higher tax bracket.

For more information please see the excellent article from the CPA association on the topic of allocating your savings here.

If you have lost your job due to Covid or otherwise

There are resources out there the help

The CPA association has a free book with information on:

  • Coping psychologically, mentally and emotionally

  • Employment law

  • Finding a new job

  • Contracting and self-employment

  • Financing your life

  • and other topics

It's called Survive and thrive: Move ahead financially after losing your job

You can download it here.

It's written by David Trahair, a great resource on personal finance. For his newsletter, books and courses, I can highly recommend his website