Survey finds Canadians are "unprepared for unexpected expenses"

Do you have cash stashed away in case your expenses rise? (Getty Images)

More than half of Canadians would not be able to adjust if interest rates were to rise or they were to take on more expenses.

This is the conclusion of Manulife Bank’s annual household debt survey, which showed 52 per cent of Canadians lack the flexibility to adjust to a change in costs.

“The survey showed that the majority of Canadians are unprepared for unexpected expenses,” says Rick Lunny, CEO of Manulife Bank. “It’s interesting because it affects two segments the millennial segment and the baby boomer segment.”

The survey showed that millennials owe more than any previous generation, so they are not prepared to meet any unexpected expenses. Baby boomers meanwhile have the majority of their wealth tied up in their home. As they get older, they may lack the financial flexibility to meet their ongoing expenses.

It’s Not (only) Your Fault

But it’s not singularly our fault, says Sandi Martin, financial planner and co-founder of Spring Financial Planning. There are many outside forces contributing to the financial state the majority of Canadians find themselves in.

“It makes my hackles rise when I read studies like this to be perfectly honest,” says Martin.

“Many Canadians are not prepared, but they are not prepared through no fault of their own. It’s not like they’re living this wild life eating avocado toast somewhere; it’s because they’re under employed, have precarious housing or any number of reasons where we could prepare a list of ways that they could get more financially prepared, but those ways would be out of their reach anyway. There are a lot Canadians who couldn’t act on the advice of a financial planner no matter what we said.”

Studies like this also don’t acknowledge the fact that while Canadian banks sounding the alarm bells around individual debt, they also make it much easier to qualify for more credit at a great profit for themselves.

“The idea that we’re going to blame consumers for using overly readily accessible credit because using that credit is in the best interest of the companies offering it seems a little bit one-sided,” says Martin.

Despite the hypocrisy and the systemic issues that may have gotten more Canadians to that point, being unable to handle unexpected expenses or a sudden rise in interest rates is a reality for a lot of us, so what can we do?

Find More Affordable Housing if Possible

Many Canadians who live in major cities like Toronto or Vancouver and the surrounding suburbs find themselves devoting the majority of their income (over 50 per cent) to housing, which really hampers their ability to save money. If you’re one of these people, maybe it’s to time to ask yourself whether it’s worth it to live in the city.

“When it comes to the city you live in and the lifestyle you have, you have to ask the hard questions about, ‘Is this necessary for me?’”

Questions like, Can I easily move? Do I have to live in the city? Do I have to have a home all to myself? Can I have a roommate or two, or three, or seven? should all be on the table.

“I don’t mean to tell people to pare down their life to the necessities that keep your body and soul together and everything else is a luxury and how dare you want it. What I mean is for the things you spend money on, why are you spending your money on that and what are you willing to give up to keep spending your money on that?” says Martin.

Get clarity on your capabilities and take ownership of the reality

No matter your employment situation or how financially successful we are, some of us spend money with the idea that we can get another client or we’ll just earn more to make up for the money we spent. It’s really tempting, but there are only so many hours in the day and it’s not always so easy to generate new sources of income.

“If you can react to things right in that moment and act on them right in that moment that’s one thing, but if you’re pushing things far into the future, our brains aren’t wired to handle that,” says Martin.

Instead, she recommends getting clarity on your actual capabilities by finding out how much money you actually need after all of the bills and recurring expenses. Then take ownership of those things coming up you’re going to have to pay for and how much they are going to be. Finally, make a plan to put money aside for them while sacrificing something else from your budget.

“Once you realize what’s coming and what you have to pay for, you have to put the structure in place to be able to make it happen. That can be putting the money in a separate account before it’s time to access it” says Martin.

Create Barriers for Yourself

One of the best ways to keep from spending the money that you do manage to save is to put as many barriers between you and your cash.

“It’s extremely effective because if you insert just one barrier between you and spending more than you really wanted to it’s incredibly effective and motivating because you don’t want to have to take that extra step to get the money,” says Martin.

These extra steps can include putting the money in a different account that’s difficult to transfer from or putting the money in a separate envelope that’s hard to get to. Something that will make you not want to make the effort to get the money.

Make Saving Automatic

Conversely, the more automatic something becomes, the easier it is to put money away.

“The more you can take $50.00 a month off the top of your paycheque that you don’t even see on an online bank account image before it’s transferred into your savings account, the easier it will be for you to at least save some amount of money over the long-term,” says Martin.

But don’t use investment accounts like TFSAs for this purpose, it may be harder to get money that you’ve put in a TFSA, but those accounts are designed for long-term investment not an emergency fund. Look to banks like Tangerine, which offer little mini accounts within one that you can label according to any spending purpose you like.

“Barriers are good for spending that’s irregular in nature, but you know is going to come. Emotionally segregating your money generally lessens the temptation to spend it,” says Martin.