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Why a financial plan matters now—and after the pandemic
By Michelle Seymour, CPA, CA, CFP® 15 February 2022 4 min read
Most of us look forward to a time, hopefully in the near future, when we can refer to COVID-19 as an endemic, rather than a pandemic. But there’s a lot we can learn from the last two years of uncertainty—from not taking our health for granted to the value of community to (our favourite) just how important it is to have a financial plan in place.
According to FP Canada’s 2021 Financial Stress Index, 77% of Canadians surveyed said that at least one aspect of their finances causes stress. This same survey highlighted the positive impact that financial planning can have on an individual’s financial stress. Canadians who work with a financial planner were less likely to say that money is their top source of stress compared to those who don’t work with a financial planner (23% versus 39%)1.
A financial plan will be unique to each individual or family and their circumstances and goals. Similarly, the financial impacts of the pandemic have varied greatly between different households. We’ll take a look at a few scenarios, each with a corresponding case study, that highlight the importance of a financial plan that can be updated and adjusted as your circumstances change, and the peace of mind that a concrete plan can provide.
The onset of the pandemic represented a difficult time for investors with equity prices falling significantly in early 2020. With perfect hindsight, we know that markets recovered quickly but that foreknowledge did not exist in the uncertainty of the bear market. So how could a financial plan help investors in that moment of choice?
Lisa and Michael
Lisa and Michael have worked with their financial advisor for over 10 years. During this time, they have had many discussions about risk, volatility and market declines. March 2020 represented the most significant market decline that they had personally experienced as investors.
Both Lisa and Michael felt anxiety as their investments declined in a short time period, and discussed these concerns with their financial advisor. She reminded them of the purpose of their investments, which was primarily to fund their retirement in approximately 15 years. She was also able to reassure them that their retirement plan was still on track despite the current market conditions. By refocusing on their long-term strategy, Lisa and Michael were more comfortable staying the course and maintaining their investments. While they still experienced stress, a normal response, their financial plan, along with their financial advisor, prevented them from acting on these emotions, selling their investments and missing out on long-term growth opportunities.
Job loss or reduced income
Some Albertans have experienced periods of unemployment as a result of the pandemic. Others have remained employed but have still experienced negative impacts to their income due to a base salary reduction or freeze, lower levels of variable pay or a reduction in hours. A financial plan may not have accounted for these specific circumstances, but can still help when the unexpected happens.
Feng and Lily
Feng and Lily had a financial plan in place well before the pandemic. Among other goals, this plan included establishing and maintaining an emergency fund. This planning ultimately provided financial peace of mind when Feng was laid off in the midst of the pandemic.
Feng received a severance payment as a result of his termination. After meeting with their financial advisor, they decided to add these funds to their existing emergency fund for the time being. They also revisited their monthly budget and determined that they would not have to make any significant adjustments to their expenses. Lily’s income had not been impacted and Feng was also eligible for certain government benefits. Their income had declined and would not cover all of their expenses but the shortfall could be addressed from their emergency fund for a period in excess of a year. In fact, Feng found employment well before their emergency fund was depleted.
Spending on discretionary items, such as travel and entertainment, declined during the pandemic. This may have been a result of public health measures preventing such activities during certain time periods, personal preference and comfort levels, or a combination of the two. In situations where expenses decreased through the pandemic while income remained constant, an opportunity to pay down debt or increase savings may have resulted, leading to an increase in an individual’s or family’s net worth.
Consider Karen, who retired shortly before the pandemic. Karen’s financial plan originally included a sizeable budget for travel in her early retirement years. Her Alaskan cruise booked for May 2020 was cancelled and she has not travelled internationally since before the pandemic. Volunteering in the arts community and attending live theatre and music performances was also a significant part of Karen’s retirement plan. Unfortunately, these activities were also put on hold as a result of various public health restrictions.
From a lifestyle perspective, Karen used some of her available time to be with her grandchildren during the pandemic, providing childcare for her son and daughter-in-law, both frontline health care workers. On the financial front, Karen and her financial advisor made some adjustments to her financial plan. Karen’s employer pension and government benefits provided for the majority of her cash flow needs during this period, so she made more moderate withdrawals from her personal investments than she had previously anticipated. She has now booked a bucket-list vacation for the spring, and is expecting to return to a more normal spending level going forward.
Planning can be of great value during difficult or uncertain times but will remain equally important when life returns to “normal”. The planning process can help you identify specific goals and chart a path to make those goals a reality. An ATB Wealth advisor can work with you to create or update a customized financial plan to meet your goals and objectives.
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