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What to do when financial plans fall through

There is an old adage, ‘don’t count all your financial chickens before they hatch’.

Okay, so maybe we paraphrased a little, but with good reason. Because making plans (or spending money) before those chickens come home to roost can leave you scrambling if those plans should happen to fall through.

Just ask the 50,000 Canadian teachers who applied for the Eligible Educator School Supply Tax Credit (EESSTC) this year, only to have their tax returns stuck in limbo.

And the reason for the delay all comes down to a slight technicality.

You see, in the 2022 federal budget, the government increased the maximum amount of the EESSTC from $150 to $250. However, Parliament hadn’t yet signed off on the new legislation (and as of publication, they still haven’t). That means, until the bill (C-8) becomes law, any education member who applied for the tax credit won’t be getting their tax refund.

It’s not exactly the kind of news one wants to hear if you were really counting on that refund.

Such as the teacher in Calgary who was expecting to receive over $12,000 back to cover important expenses, including the cost of a new battery for her motorized wheelchair. The delay in bill C-8 being passed means those funds won’t be coming in anytime soon.

So, what are your options when the finances you were relying on fall through?

“If you have no savings to draw from, leveraging credit is definitely one avenue,” says Educators Financial Planner professional Lisa Raponi. “But remember that credit is always meant to be a temporary fix and not a permanent solution.”

However, if you do need to rely on credit for a bit, be sure to also weigh your borrowing options.

“Ideally you’ll want to choose the path of least interest,” continues Lisa. “This means avoiding racking up credit cards, as those tend to be where the interest is typically highest. Lines of credit, on the other hand, usually offer rates on par with mortgages and personal loans, sometimes even lower.”

If you’re not already approved for a line of credit, Lisa has this important piece of advice.

“Set up a line of credit before you actually need it, as borrowers will see you as being more ‘low-risk’ to lend to when financial waters are smooth. Plus in this scenario, they’ll be more prone to qualify you for a higher amount. Whereas the qualifying amount would most likely be much less if you waited for an actual emergency to happen.”

Tip: Borrowing equity out of your home (HELOC) could also be another backup option when financial plans fall through. Just beware of borrowing yourself into a never-ending balance.

In order to leverage credit responsibly, it also helps to fully understand both the pros and cons of your borrowing options:

 

Debt Vehicle

 

 

Pros

 

Cons

Personal Loan

·        Set payment term

·        Can be paid off anytime

·        Higher interest rate
Credit Card

·        Low minimum payment

·        Revolving limit

·        Higher interest rate

·        Can have debt for life

 

Line of Credit

·        Like a low-interest credit card

·        Revolving limit

·        Can be paid off anytime

·        No set payment term

·        Can have debt for life

 

Mortgage

·        Set payment term

·        Lowest borrowing rate

·        Pre-payment restrictions

·        Not easily refinanced

·        Long amortization

If your debt options are limited due to your credit limits being pushed to capacity, a consolidation loan might give you the immediate cash flow reprieve you need.

“There’s no denying that day-to-day life is now more expensive than ever thanks to inflation,” adds Lisa. “It’s why the current national debt-to-income ratio is at an all-time record high—Canadians have been leaning a lot more on credit to get by. But you can only tread water for so long, especially with further rate hikes on the horizon. That’s where putting all of your eggs into one basket could actually work in your favour where personal debt loads are concerned. By basket, I’m referring to consolidating all of your high-interest debt balances into one manageable monthly payment.”

The benefits of debt consolidation:

  • Simplifies your finances (multiple loans/payments become one)
  • Saves you money overall in interest payments
  • Provides the ability to repay your debt sooner
  • Gives you the potential to improve your credit score (i.e. with only one loan payment to keep track of, you’ll be less likely to inadvertently miss/be late making a payment)

Most important of all, you’ll be able to free up monthly cash flow, which you can then put towards a more proactive approach to navigating financial challenges, such as building up savings.

“Naturally, having a savings cushion to lean on when needed is the ultimate option you should be striving for,” states Lisa. “And yet it can seem easier said than done, especially when you’re at the start of your career and cash flow is tight. But that’s where working with a financial planner or advisor can help. After all, you only know what you know—and for everything else that you don’t, well, that’s where a planner comes in. Our job is to show you attainable ways to realize your savings goals, no matter where you are on the pay grid. Because every education member deserves to have financial peace of mind at every stage of their career.”

A few final tips to get you started on your journey toward financial freedom:

  • Get a handle of your cash flow by creating a budget
    Mark down what’s coming in and what’s going out (money-wise). Whether you jot the numbers down manually or use an online tool, a budget won’t work until you get the full 360-degree view of your financial situation.
  • Trim unnecessary expenses
    Once you have a list of your monthly expenses, divide it into three categories—‘necessities’ (i.e. food, gas, mortgage/rent, utilities, phone); ‘debt payments’ (loans, credit cards); and ‘luxuries’ (coffee, eating out, online gaming/shopping, entertainment, etc.), then see which areas you can trim back on, or cut out altogether. You can then allocate the extra cash flow towards saving for your various financial goals. When evaluating your expenses, don’t forget to factor in the time of the year when you most likely spend more on fringe purchases (I.e. summer months, birthday gifts, holidays, etc.).
  • Build (up) an emergency fund
    No matter how much you plan for, life tends to throw a curve ball every now and then (your car breaks down, appliances stop working, contract talks stall). Saving money for the unexpected ensures you’ll have the funds to deal with an emergency, should one arise—without having to take out a loan, or take away money from other savings goals.
  • Plan for any leaves
    If you are planning to take any leaves down the road (4 over 5 / X over Y, maternity, etc.), you may want to build a savings plan into your budget to buy back pension credits to cover that leave. According to the Ontario Teachers’ Pension Plan, paying for a $10,000 leave could increase your pension by about $1,900 each year—which, if you were to spend 30 years in retirement, could mean as much as $57,000 more.

And last, but not least, reach out to us for educator-specific advice.

What sets Educators Financial Group apart from the rest is our understanding of how your pay structure works during your working years and in retirement. This means we can work with you to create a plan to ensure your finances are on track not only through every life stage and change—but also through every raise up the pay grid, right up to the moment you start collecting your pension and beyond.

Don’t wait for an emergency—take action where your finances are concerned, right now.

Sources:
https://www.cbc.ca/news/morning-brief-april-29-2022-1.6433733
https://betterdwelling.com/canadian-households-reversed-progress-on-debt-hits-a-new-record-high/

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