Could the COVID-19 pandemic leave us with an empty piggy bank?
Emergency fund… or plan?
Back in February 2019, I wrote a post titled, You Don’t Need an Emergency Fund (You Need an Emergency Plan). In the post, I shared our emergency plan, which is designed to carry us through a variety of worst-case scenarios.
Having gone through our plan many times, I felt 100% confident that it would stand up to just about any disaster. But then this crazy thing called COVID-19 happened, and it got me wondering: Would our plan still hold up?
This is only a test
As I mentioned in my recent monthly update, we’re very fortunate that my husband M has a stable job. For now, it looks like he’ll remain gainfully employed.
However, this pandemic has thrown so many twists and turns our way… and it’s not even close to over. We have no idea if we’ll still be okay in 6 months or a year from now.
That’s why I thought it’d be a good idea to run through our emergency plan as if the worst had actually happened.
Acknowledging my privilege
I realize that not everyone is in a stable financial position right now. I also recognize that financial challenges are not always avoidable or in our control.
Please know that my intention with this post is neither to boast nor judge. My hope is that by sharing my experience and knowledge, I can help others to better their own financial situation—now and in the future.
What kinds of emergencies could we encounter?
To start, let’s review the emergency situations I listed in my emergency plan post:
1. Loss of income:
- Job loss.
- Serious injury or illness.
2. Unexpected expenses:
- Major home expenses.
- Major car expenses.
In this pandemic, the most likely emergency we’ll face is loss of income. That would happen if M were to lose his job or if one of us was to get sick (possibly with COVID-19).
I won’t include unexpected expenses in this stress test. That’s because we’re covered for these emergencies through insurance. As long as we can pay the premiums and deductibles, we won’t need to worry about these expenses during the pandemic.
So, this stress test will only focus on how we’ll prepare ourselves for a significant loss of income.
How we’re covered for loss of income
To recap, here are the two most-likely reasons for a loss of income for our family:
- M loses his job.
- One or both of us becomes seriously ill with COVID-19 (which would lead to M not being able to work).
Now it’s time to run through each of the backups we’ve planned for and see if they would’ve worked. I’ll list a best and worst-case scenario for each.
At the end, I’ll decide if our overall plan worked out, based only on the worst-case scenarios.
1) Steady job
M’s a hard-working, well-liked, and respected employee. His job is also relatively stable—so job loss is highly unlikely.
- If M were to lose his job, it obviously wouldn’t help us.
- However, if he still had his job but got sick, he’d have short-term disability from his employer. (More on this in the insurance section below).
- If I were the one to get sick, M would likely have to take time off to care for me and the kids. He has a lot of accrued vacation time, so he’d have no problems taking a couple of months off with full pay.
M would keep his job and we wouldn’t experience much of a loss in income, thanks to his disability insurance or paid vacation time.
M would lose his job and one or both of us would get sick. In this case, this backup plan would not pan out.
2) Severance pay
If M was laid off, he’d receive severance pay of one month per year of employment. At 15+ years of employment, we’d be well-covered.
- During COVID-19, this backup would be iffy.
- Even large companies are struggling to make ends meet, so it’s possible that M’s company wouldn’t have the funds to pay any severance.
M receives some severance which would give him plenty of time to find a new job. My guess is the minimum he’ll receive is three months of severance.
M receives no severance at all and is only given two weeks’ notice.
3) Government employment insurance
If M was still unemployed once his severance ended, he’d receive EI. While it’s not much, it would cover some of our expenses.
- During COVID-19, it looks like Canadians will first be funneled through the CERB (Canada Emergency Response Benefit) program.
- Once eligibility for that runs out, then M could apply for regular EI payments.
- As far as we know, both programs are on sound footing and are getting much-needed income to unemployed Canadians.
- So yes, this backup plan would be there for M if he needed it.
M would receive $500 per week for up to 16 weeks with the CERB. After that, if he were still unemployed, he could apply for EI.
At that point, M would be eligible to receive up to $573 per week for 45 weeks with EI. This would be enough to cover most of our core expenses, but not our investment loan payments.
M reaches the end of 16 weeks of CERB and 45 weeks of EI coverage and still can’t find a job. On top of that, we aren’t able to cover our investment loan payments.
4) House hacking
We’d continue hosting students, and could increase our efforts to host more students, more frequently.
- Since no one is travelling, and we wouldn’t feel comfortable accepting international guests, this would not have worked as a backup plan.
There’s no best-case scenario with this.
We won’t be able to host students for the duration of the pandemic. (And likely not for months beyond.)
5) Go back to work
I’d be happy to swap with M and go back to work so he could stay home with the kids.
- I would definitely be able to do this, so yes it would work.
- I’d have to look for a job that’s currently hiring and pays immediately. That would most likely limit me to low-paying jobs.
- If I were to try and find higher-paying gigs online, the pay would likely not be steady or reliable.
I could find a decent-paying remote work job, which would allow me to work from home. But more likely, I’ll find a part-time, low-paying job.
This small amount of income, combined with M’s government benefits, would cover our core expenses and the payments for our investment loan.
I can’t find a job, and since I’ve been a stay-at-home mom for 15 years, I don’t qualify for any government benefits. This means we’d need to live on M’s government benefits alone, with no income to pay for our investment loan payments.
We have life insurance, and M has good disability insurance at work.
- As long as we could afford to keep paying our annual premiums for life insurance ($455) we’d be covered if one or both of us were to pass away.
- As long as M keeps his job, we’d be covered if he was sick or injured.
The best-case scenario would be if we don’t die or get sick, and don’t need either insurance.
However, I suppose if one of us died, that would technically be a best-case financial scenario since the survivor would receive a large life insurance payout.
Am I horrible for thinking that?! 😬
M loses his job and one or both of us are unable to work because we’re sick or injured—but not dead. In this case, we would receive no insurance coverage of any kind.
7) Universal healthcare
Fortunately, we’re Canadian—so we don’t have to worry about most healthcare costs.
- For the most part, yes. We would mostly be taken care of.
- However, if M lost his job, our extended health coverage would end. That would mean no coverage for things like prescriptions, massage therapy, psychology, etc.
- These things could be necessities, so we would have to pay out of pocket for these healthcare costs if M lost his job.
M keeps his job, and nothing would change.
M loses his job, and we and/or the kids need prescription meds, medical devices, or therapy. We would have to pay out of pocket for these expenses, which could add up to several thousand per year.
8) Family support
If I was the one who was injured or ill, M could keep working because we have plenty of family nearby to help with getting the kids to school and other day-to-day stuff.
- The help our families could provide during COVID-19 would be limited, due to the physical distancing requirements.
- However, our kids are old enough now that we wouldn’t need a lot of childcare or help with school. We’d mostly need help with things like cooking and cleaning.
- Our cleaning standards could be lowered so the healthy spouse could manage it with the kids’ help.
- Our cooking could be simplified, and our families could definitely pitch in to cover some or most meals.
- At worst, we could bubble up with M’s parents and possibly move in with them while one of us was recovering.
We’d be able to manage by lowering standards and relying on the kids for help, with a little bit of help from family. At worst, we could temporarily move in with M’s parents.
If one of us was sick with COVID-19, we would have to isolate and avoid being in close contact with anyone else. In the worst-possible scenario, M loses his job and all four of us become very sick with COVID-19. In this case, the most we could ask from family would be to help us with food.
The absolute worst-case scenario
Alright, we’ve run through all our backups and figured out the worst-case scenarios for each. The absolute worst-case financial scenario would then be:
- M loses his job and receives no severance.
- We’re mostly okay while he’s receiving his government benefits. But in 51 weeks when all his benefits run out, both of us still aren’t able to find jobs because there are none to be found.
- Since he has no job, and we aren’t dead, we would neither receive life insurance or disability coverage.
- All four of us get sick with COVID-19, so no one can physically help us since we’d be a danger to them.
I’ll also assume that we’ve already exhausted the no-cost cashflow options I listed in my emergency fund post:
- Excess cash from our regular cash flow.
- Cash saved for annual expenses (e.g. insurance, property tax, investments, vacations, etc.)
- Credit cards (which could be one-month interest-free ‘loans’).
- US cash (which we keep for US travels and expenditures).
- Savings from not spending on discretionary expenses.
Additionally, I’ll nix the idea from my emergency plan post of using an LOC. In this situation, using an LOC would likely not be suitable since it’d be a long-term emergency of unknown duration.
Summary: our absolute worst-case scenario
We’ve reviewed a lot of scenarios—even I’m having a hard time keeping it all straight! Let’s summarize it so we can see it all clearly:
It’s June 2021, and all four of us are sick with COVID-19. We have no more government money coming in, no extra stashes of cash, and no LOC to pull from. We’re totally on our own now. What do we do?
It’s time for Plan F.
Plan F? What’s that? I call this Plan F because this is where FI comes to the rescue.
Looking at this dire scenario, I’m once again grateful for our ability to pursue FI. Because we’ve lived well below our means for many years, and have had the opportunity to save and invest much of our income, we have what’s essentially a massive emergency fund.
That’s right—our FI nest egg could be repurposed to fund our living expenses until we got back on our feet. While this is not ideal (see the box below for reasons why) we wouldn’t starve, lose our home, or become destitute.
We’d make it quite comfortably through this crisis. And at the end of it all, we’ll still be young enough to rebuild our nest egg.
Be aware of the downsides
If you’re considering your own Plan F, be aware of the downsides before you proceed:
- Your investments will likely be down, so you’ll be withdrawing a larger percentage of your nest egg.
- The more you withdraw, the more you’ll set yourself back from reaching FI.
- If you run out of taxable and TFSA investments to sell, you’ll have to withdraw from your RRSPs.
- Remember that when you withdraw from RRSPs, you can’t recontribute next year like you can with TFSAs. The contribution room is gone forever.
Testing our Plan F
To test our Plan F, let’s stretch the worst-case scenario a little further into the future:
- M’s government benefits run out after a year.
- For another two years, we’re both unable to find stable employment.
- Our investments lose half their value.
- We see no investment growth over the entire three years.
Based on my calculations, we’d need to withdraw about 15% of our investments to cover our living expenses for two years. While that’s a huge chunk, we certainly wouldn’t get close to zero.
At the end of it all, we would be 44 and 47. Even with such a major setback, I’m pretty darned sure we could still reach FI before 65. That right there speaks to the incredible power of FI.
What about our investment loan?
For those who are paying attention, you may have noticed that I said M’s government benefits won’t be enough to cover our core expenses and our investment loan. Gulp!
No worries—I have a plan for that too:
- We would withdraw from our TFSAs and my taxable account to make the payments on our investment loan.
- There’s more than enough in our TFSAs and my taxable account to keep this up—even if those investments were down and we’re unemployed for two (or more) years.
This sounds crazy
Most of you are probably getting ulcers already! How can I sleep at night, knowing I’ll be paying for our loan by selling investments?
This honestly doesn’t faze me. Our financial planner would not have advised us to take out an investment loan without multiple contingency plans in place.
He did the math and included this in our plan before we took out our loan. Since then, I’ve reviewed the plan many times and am 100% confident in it.
Sure, withdrawing early from our investments would set us back. But it would only be temporary. We’ll eventually be employed again, long before our investments run down to the point where we’d be in trouble.
A solid financial plan is KEY
Because of all this pre-planning, I know that we’ll easily be able to cover our loan, and that it’s the most financially-advantageous plan.
This situation once again underlines the importance of proper financial planning. You do not want to be suddenly out of work, with no idea how to handle a large loan.
Please take care of your financial well-being by planning well ahead of time.
The final verdict
Without a doubt, life would be brutal if our worst-case scenarios all came to be. We’d have to drastically cut our spending, and our stress would be through the roof.
However, I’m comforted to know that we’d have about a year of government benefits to help us get by. If we faced another two years of unemployment after that, our FI nest egg could become an enormous emergency fund.
That would be a huge setback in our timeline to FI. But even then, I’m nearly 100% confident that we’d still reach our goals before the age of 65. This again shows me how important an emergency plan is, and powerful the FI lifestyle and mindset is.
Even in such a dire, challenging scenario, we’d be more than okay.
What do you think?
Is our emergency plan sound? Can you poke holes in it? Do you have different backup plans to share? I’d love to hear your thoughts—please share and comment below!
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