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FINANCIALLY AESTHETIC · GUIDE 06/37
FINANCIAL RESILIENCE: SINKING FUNDS, INSURANCE & SHOCKS
FA-1.6 · The Money Operating System
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START HERE
The point of resilience is to stop one predictable problem from turning into expensive debt.
Predictable Expenses That Aren’t Emergencies
When a large payment is coming up, be sure to set aside a portion of the amount each month so you’ll have it available when you need to pay it. Pay all your fixed expenses on time. Otherwise, take the initiative to discuss the issue with your creditor or banker.
Be careful: if you take out a credit, in any form, don’t forget to treat the repayments as a new fixed expense, and adjust your other expenses accordingly if necessary.
This approach to gradually setting money aside applies to expenses that are known in advance and are regular in nature, even if their exact amount or due date varies. An emergency fund, on the other hand, addresses a different category of need: don’t confuse unforeseen expenditures with occasional expenses such as school supplies, winter tires, or even holiday expenses. These occasional expenses should already be factored into your budget.
A similar distinction applies to emergency savings: it should not be used to pay for regular expenses, such as rent, electricity, groceries, leisure activities, travel, etc. It should be set aside to deal with unforeseen events, which by definition are irregular. Emergency savings are also different from savings set aside for specific projects, for which the amount and timeframe are already planned.
Similarly, to distinguish a true emergency from an expense that can be planned for: if you’re unsure, go back to your list of needs and wants. An emergency is a major, sudden need that isn’t part of your current budget and wasn’t planned for.
Keep Proof of Payments
This basic rule is often overlooked. However, by keeping your receipts, bank card statements, and carefully filling out your check stubs, you’ll always be able to verify that you haven’t been charged for anything in error. If you have any doubts or can’t remember an expense listed on your account statement, you should be able to find it among these documents. If not, you’ll be able to dispute the charge with confidence. Finally, by keeping these documents, you’ll have a clearer picture of the expenses you’ve already incurred, which will help you determine in advance whether you can afford a purchase or not.
Insurance: Transferring Risk
Insurance protects you and your loved ones against financial risks. It helps cover costs if something unexpected happens to:
- you or your family
- your car
- your home
- your belongings
- your job
There are several insurance products available to cover different types of risks.
When trying to determine your insurance needs, consider your situation and stage of life. For example, you may want to consider getting insurance if you:
- move in with your spouse
- are starting a family
- buy a house or rent a house or apartment
- are starting a business
- buy a new car
- Get a loan or a credit card
The Insurance Contract
An insurance policy is a legal contract between you (the insured) and the insurance company (the insurer).
An insurance policy specifies:
- the risks covered by your insurance company
- the circumstances under which the insurance company will pay you a payment
- how much money or what kind of benefit you will receive if you file a claim
Generally, the policyholder is the person who owns the insurance policy. In some cases, the policyholder is not the person who is insured. The policyholder may be a family member or a loved one.
The amount of money you receive depends on:
- the extent of the damage or loss to your home or car
- what is specified in your policy (for life insurance or health insurance)
Make sure you understand what is covered and what is not. Ask questions about anything you don’t understand.
Premiums
To get insurance, you must pay fees called premiums. Premiums are usually paid on a monthly or annual basis. Premiums may change over time for certain types of insurance.
Insurance companies determine the amount of your premiums based on how much they would have to pay if you file a claim. They may charge you higher premiums if they believe you are likely to file a claim.
Generally speaking, the amount of your premiums depends on certain factors, such as:
- the type of insurance
- your age
- your gender
- your medical history, for life and health insurance
- the value of the insured property, for home insurance
- the type of car you drive, for auto insurance
- the amount of coverage you need
- your deductible
- your claims history
- the amount you owe, for credit insurance
When you pay premiums, your insurance company agrees to pay a certain amount for any loss or damage covered by your insurance policy.
Deductibles
Health, dental, auto, and home insurance policies may require you to pay a deductible. The deductible is the portion of your claim that you must pay before your insurance company pays the rest. The higher your deductible, the less you pay in premiums.
For example, let’s say you file a $2,000 claim, but you have a $500 deductible. Your insurance will cover only $1,500 of your claim.
Exclusions
Exclusions are things that are not covered by your insurance policy.
Examples of exclusions include:
- An insurance policy for health may exclude certain medical conditions you had before applying for the policy
- An insurance policy for travel may exclude claims made if you are traveling to a high-risk country
- A home insurance policy may exclude claims for certain types of water damage
- An insurance policy for the credit card balance may exclude claims made for certain types of illnesses
Endorsements
An endorsement is additional coverage you can add to your insurance policy for an extra fee. It covers risks not covered by your basic policy. Ask your insurer what is and isn’t covered by your policy. This will help you determine which risks might require additional protection.
Income Shock: Job Loss
Amounts You May Be Owed
If you lose your job, your employer may owe you money. Your provincial or territorial government oversees the calculation of the benefits to which you may be entitled.
To determine the amount of compensation, review any documents that describe your salary and the terms of your termination.
These documents may include:
- a letter of offer you received when you got the job
- an employee handbook
Severance pay is an amount your employer pays you instead of giving you advance notice of job loss. For example, instead of notifying you that your job will end in 2 weeks, your employer might pay you severance pay. This means your job ends immediately.
You may receive a monthly salary rather than being paid by the hour. In this case, your employer may be required to pay you for any unused vacation days.
If you are paid an hourly wage, your employer may give you a percentage of your salary as vacation pay. This is usually 4% to 6% of your annual salary.
Severance pay is the amount of money your employer must pay you if you lose your job. This applies only if you lost your job through no fault of your own. The amount of money you are entitled to depends on how long you have been employed.
Review Your Budget
Losing your job means you’ll have less income to cover your household expenses. You may have to cut back on your spending.
The first step in creating a budget when your income decreases is to understand how you spend your money. Review your expenses and identify which ones you can cut back on. This will give you more money to pay for the things you really need.
Use Your Savings
If you have access to money in a savings account, use it now to pay your day-to-day expenses. This will help you avoid using credit and getting into debt while you’re conducting a job search.
If you have an emergency fund, now is the right time to use it. Be sure to start saving again as soon as your income increases.
Available Benefits
Employment Insurance (EI) can help you manage your finances until you find a new job. It provides regular benefits if you lose your job through no fault of your own. EI pays a percentage of your previous earnings, up to a certain amount.
Apply for benefits as soon as you stop working. It may take some time before benefits start.
You may have insurance that could help you manage your debts while you’re unemployed.
This may include:
- credit balance insurance
- mortgage insurance in case of job loss
- credit or loan insurance
Generally speaking, this type of optional insurance can cover your loan, mortgage, or credit card payments. You can file a claim with your insurer to have your payments covered temporarily. This applies in the event of job loss, illness, an accident, or your death.
Read the terms and conditions of your insurance policy carefully.
As a general rule, you must wait a certain amount of time after losing your job before you are eligible for benefits. You must also usually have held the insurance policy for a certain period of time before you can file a claim. This period is generally 30 to 90 days. You must continue to make at least the minimum payments until your insurer approves your claim.
Documents to Have On Hand Before an Emergency
Start by gathering basic supplies, documents, and medical equipment before moving on to additional supplies.
Keep both physical and digital copies of important documents such as:
- identification documents for each person (birth and marriage certificates, passports, citizenship documents);
- health insurance information and provincial or territorial health insurance number;
- other insurance information, such as homeowners’, renters’, or auto insurance;
- banking information and records.
Rebuilding After the Disaster
Once the crisis has passed - compensation received, savings tapped, benefits requested - the rebuilding of the financial system follows the same logic as its initial construction: When faced with an emergency, don’t hesitate to use your emergency fund. The purpose of the emergency fund is to prevent you from having to resort to expensive credit options.
Although your emergency fund should always be easily accessible, don’t be tempted to dip into its balance. Leave it untouched for a true emergency.
Once you’ve built up your emergency savings, you can then allocate the excess portion of your budget to other projects or invest your money in financial, real estate, or other investments.
Reviewing your financial goals is a regular part of the process: review your financial goals regularly. Your family, personal, or professional situation can change quickly, and this can affect your budget.
Even minor changes can affect how long it will take you to reach your savings goal.
These changes may include:
- the arrival of a newborn
- buying a new home
- an increase in your property taxes
- a rise in electricity costs
When these events occur, you need to adjust your budget accordingly so that your emergency fund remains a priority.
Take advantage of every opportunity to build up your emergency fund. Deposit extra money into your savings account whenever possible.
For example, you might have extra money when:
- you receive a tax refund
- you receive a wage increase
- you sell something (such as a car, jewelry, or furniture)
- you receive money as a gift
- you receive a cash bonus for labour
When you’ve finished paying off any type of loan, this is a great opportunity to boost your emergency fund. Take the amount that was set aside for your monthly payment and deposit it into your savings account.
These payments are already part of your budget, so why not put them to good use?
SYSTEM CHECK
Separate emergency cash from planned sinking funds and insure risks you couldn't absorb alone.
- Ayez une trousse d'urgence - Canada.ca - https://www.canada.ca/fr/services/p...n/preparez-vous/kits-urgence/obtenir-kit.html
- CFPB - An essential guide to building an emergency fund - United States - emergency saving principles.
- MoneyHelper - Emergency savings: how much is enough? - United Kingdom - emergency saving.
