With economic conditions worsening, pink slips are flying thick and fast. Statistics Canada reported that more than 71,000 full-time jobs were lost in December and Finance Minister Jim Flaherty warned that Canadians were “in for a very difficult year”. January brought more bad news on the jobs front with Circuit City alone letting go 30,000 employees.
Assess your personal situation: How stable is your job and how likely it is that you might be let go? Take my personal situation. I work for a company whose fortunes ultimately depend on consumers spending hard-earned cash on electronic knick-knacks. It is not a recipe for stability at the best of times but with consumers tapped out, my odds of getting laid off are pretty high. My wife, on the other hand, works in the public sector and the odds of a job loss are very slim. In fact, even the possibility of a reduction in pay is quite remote. Many workers won’t be so lucky. Already, bonuses are hard to come by and at least one company has announced that it is cutting base pay for employees by 5% to 15%.
Figure out a worst-case scenario: How long can your household last on a lower, or indeed, no income? To find out, check your current expenses to see what can be cut out to run your household in survival mode. That should give you a good idea of how long your emergency savings and future income from severance payments (assuming your employer is in relatively good financial health), EI benefits (which are paid out after a 2 week waiting period) and other income (such as the income from a portfolio) will last.
Increase your rainy day funds: If you are uncomfortable with how long your household can survive on a reduced income, start stashing away more in your emergency savings account. The usual thumb rule is to have three to six months of expenses in an emergency fund but you may want to think about saving more by cutting back on discretionary spending. There is nothing like cash in the bank to provide the fortitude to survive tough economic conditions.
But, don’t avoid risk altogether: It is perhaps natural that appetite for risk is much lower when our pay checks are not safe and our portfolios are smaller. But if you are confident about your defence, don’t forget to go on the offence. Many, if not almost all asset classes are significantly cheaper than they were and while markets will remain as unpredictable as ever, the long-term return expectations are looking attractive.
