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Recession. It's on everyone's mind. Is it your first one? Sadly, it won't be your last. Economic volatility is a fact of life, and recessions come...and go. Wikipedia says there were 11 recessions between 1945 and 2001 in the US. And this article from the Toronto Star documents a few of the recessionary periods here in Canada.
Despite a miniscule reduction in inflation, the Bank of Canada has said it still intends to continue with rate hikes, even if it pushes us into an economic recession. Economists are divided on whether that’s a sound strategy, but regardless, this is what we know. Economies go up, and economies go down – and it’s the average consumer who feels the brunt of it in their pocketbook. The three areas where you are most likely to feel the impact are your three largest expenses: housing, food, and energy. What can you do as your expenses grow and your income doesn’t?
It's really important to build as much of a cushion as you can. This might seem counter-intuitive, to look for more money, when the money is going out of pocket is on the rise, but it is the best way to protect yourself. I used to laugh at my frugal father, never buying on credit, pinching every penny, and making things last, and last, and…last. We were the last ones on the block to get the newest anything (by which time it was no longer new at all). Yet in retrospect, Dad was right in so many ways. And it would be easy enough to say you should have been pinching pennies all along, but the truth is, the only direction we can act on, is forward.
Let’s break down how to save as much as possible in each of those three key areas.
First, I’ll start with housing. If you’re a renter, it’s definitely difficult to cap your housing costs, since the landlord has the power (especially if you are in Toronto). Unless your unit is rent-controlled, it’s possible you’ll face a steep rise in rent prices the next time there’s an anniversary of your first lease. I’ve seen articles that say you should move to a cheaper place, but in many cases, there is no cheaper place. We face a chronically low renter-to-unit ratio in this city. And as long as that is the case, it will be very hard to find an affordable apartment or house. If you are a homeowner, the greater worry is rising interest costs. Over time, as I’ve said before in this blog, variable rate mortgages have been the way to go – the rates are typically lower than fixed rates. But with recent Bank of Canada rate hikes, it can get pretty scary – so you may want to consider locking in your mortgage at a fixed rate. Even if you’re not up for renewal yet, it’s a good idea to talk to a mortgage agent to get some tips on what to look for. An example is making sure you have the best pre-payment options possible, in case you do get a raise or come into some money. You may also be able to reduce your monthly payment by extending your amortization, and then shortening the timeline again if interest rates ease up in the future. This all depends on how flexible the terms are on your mortgage – which is why I always caution that rate isn’t everything when securing a mortgage on your home.
Next, energy costs. In most cases, this is what you pay for heat, lights, and in summer, air conditioning. Here in Canada the last one won’t be a concern for the time being. It’s important to ensure your heating equipment is running as efficiently as possible, so if you have a furnace or heat pump, especially, it may be worth the cost of a service call to have a technician make sure everything is in top working order. Definitely clean or replace all the filters, as they can contribute to heating appliances that must work harder (and therefore consume more electricity and/or gas). Next, re-model your own behaviour. Shut off lights in any rooms not currently being used (if you’re in your home office, turn off the kitchen light, for example). Turn down the heat and put on a sweater! Experts say that reducing your thermostat by 1°C can reduce heating bills in a typical home by as much as ten percent. Open blinds or curtains when the sun is streaming in, and close them in the evenings to keep the heat trapped inside. Switching to equal billing won’t reduce what you pay overall, but it can spread the cost more evenly, making your budget more predictable.
Lastly, food. This is a huge expense for most of us, and more so if you work long hours and rely on lots of take out food or convenience foods. The first thing you can do to take your food budget down a notch is to menu plan and comparison shop. (Beware, though, of driving all over to save a few dollars – you may use up what you’ve saved in gas). Instead, keep a running list and get to know who had the lowest prices on key items. Make stops at stores that are exceptions to your list when you are already going to be in the area. Big batch cooking and freezing meals for later in the week can help manage the high cost of convenience. At the store, stick to your list. Buy house brands. And if you’re in Toronto, check out the prices of fruits and vegetables at small neighbourhood shops – they have the advantage of buying in small lots, often on a daily basis. Although they don’t have the volume discounts of the big chains, they’re nimble and therefore able to take advantage of specials. The Toronto Star had an excellent article on this recently. If you’re short on storage space for bulky purchases (like large bags of flour or potatoes, or family packs of meat or vegetables or cheese), why not split them with a neighbour or friend. You each get the lower price, but without the need for more space.
Once you’ve managed costs, here’s a quick list of things to do, to prepare for what may turn out to be a more frugal winter than any of us really want:
- Pay off/pay down credit cards and don’t carry a balance. The interest costs are simply too steep.
- Build up your emergency fund. Recessions can mean job losses or other unexpected events, and paying for those emergencies on credit will just compound your problems.
- Get a real handle on your spending, and make sure you aren’t confusing needs with wants. It’s easy to tell ourselves we deserve a reward for working hard, scrimping, and saving, but until you can pay for the trifecta of housing, energy and food without going into hock, you need to stop spending on other things.
If you’re thinking of taking advantage of falling home prices despite all that, good for you. Make sure you’ve allowed yourself a good cushion for repairs. Find out whether you can take advantage of any energy rebates to make your new property more efficient (maybe even net zero). Lastly, consider a fixer-upper, and live with its less beautiful aspects for the time being. Every project you’re able to do yourself adds equity to your home while keeping money in your pocket. If you can manage a downpayment and the mortgage payments, there are still opportunities out there for buyers. Don't plan to flip, but buy and hold for at least five years, and you'll ride out this down cycle and come out shining on the other end.