If you’re among the fortunate Canadians whose income has remained constant during the extended COVID-19 lockdown, all this staying at home should mean more money in your pocket. It’s been so long since I had to drive anywhere, my car’s side mirrors are literally gathering cobwebs; we eat out much less; and we can’t yet go to movies, sports events or the theatre.
What to do with this bonanza of found savings? We asked four experts what they recommend clients do with an extra $500, $1,000 and $10,000.
Adrian Mastracci, portfolio manager with Vancouver-based Lycos Asset Management Inc., suggests any extra savings should be “parked out of sight” for a month or two while you analyze your needs and options: “Don’t rush into anything, no matter how appealing.”
Parking extra cash in a savings account is a starting point, and couples need to figure out whose money it is for tax purposes. Of course, savings accounts pay almost nothing, so the tax burden will be relatively light for the partner who elects to claim it.
On the other hand, if you owe money, interest charges will be more substantial. (Funny how that works!) So, repaying debt—particularly high-interest credit-card debt—is a top-notch, risk-free way of deploying cash, Mastracci says. Trimming lines of credit, student loans or mortgages is always prudent. Donating to charity may confer some tax benefits.
Those with their own businesses may consider adding to business capital. If you pay taxes by installment or expect to have to pay tax time next April, setting funds aside for that purpose is prudent. Or you could lend it out at the CRA’s prescribed rate to whichever spouse is in a lower tax bracket.
Certified Financial Planner Aaron Hector, vice-president of Calgary-based Doherty Bryant Financial Strategists, says those nervous about their employment status should leave the money parked while they wait and see what transpires. “Flexibility is very important, and cash provides flexibility.” You should determine if there really are true savings or you are simply experiencing a delayed expense, as may be the case if a planned vacation was cancelled because of COVID. If so, that money will eventually be spent, Hector says, “so I think it is reasonable to park that money in a high-interest account and wait.”
Only if there really are excess funds would Hector suggest staying true to an existing investment plan. “Unless there is a fundamental change in risk tolerance or goals, they should keep doing what they were doing previously.”
COVID-19 has forced everyone to rethink financial goals and objectives, says CFP Robb Engen, the blogger behind Boomer and Echo. “For some retirees, that has meant putting off large projects like home renovation until better times. But for those who have enough income to meet their spending needs and then some, I’d recommend squirrelling away any extra cash savings in a high-interest savings account to ensure you can pay cash for your next big-ticket purchase without cashing in any investments.”
Speaking of which, you may be keen to invest any “found money” by contributing to your RRSP or spousal RRSP. Or you could top up TFSAs, or start one for adult children who have yet to open one. If all registered contribution room has been spoken for, add to taxable accounts.
As a die-hard indexer, Engen—one of the experts on MoneySense’s annual ETF All-Stars feature—suggests an asset allocation ETF, assuming all short-term goals have been funded and accounted for. “An asset allocation ETF like Vanguard’s VBAL can be perfectly reasonable for a new retiree to hold for a 20- to 30-year retirement, and any future withdrawals from a TFSA are tax-free and will not impact means-tested benefits such as OAS.” Given his high own risk tolerance, Engen personally invests in the 100% stocks VEQT, his Desert Island pick.
However, he’s more cautious for clients. For older folk wanting some fixed income to cushion any further COVID-related market volatility, consider VBAL or VCNS (60% and 40% equities respectively.) BlackRock Canada’s iShares has a similar set of asset allocation ETFs, as do Horizons ETFs, all highlighted in the latest All-Stars package.
Matthew Ardrey, vice president for Toronto-based TriDelta Financial, says if there are no debts to pay off or shorter-term needs, you can invest for the long term. “With smaller amounts, I would look at investing in a solid blue-chip Canadian dividend-paying stock like CIBC or BCE. These both have dividend yields around 6%.”
However, for the larger $10,000 amount, Ardrey recommends considering an alternative income investment. These experienced little or no fluctuation during the March market downturn and yields range from 7% to 9%, he says. “These types of investments can provide a unique diversifier away from stock markets, especially if a second [COVID] wave causes a pullback.”
Ardrey uses the TrezCapital Yield Trust US: TRZ370 is the ticker for the Canadian-dollar F class version, a mutual fund offered via an Offering Memorandum; there’s a $5,000 minimum if you use an investment counsellor.
How would I play COVID found money myself? For $10,000, I’d go with any of the asset allocation ETFs mentioned earlier. For either $500 or $1,000 I suggest getting a bit more aggressive with something like the actively managed Ark Next Generation Internet ETF (ARKW/Nasdaq). This has done very nicely since I bought it earlier this year and might be a good TFSA investment: it’s a long-term growth play on the latest technologies, like AI and the cloud. Those with a similarly speculative bent might try a 5G ETF like NXTG, which was ETF All-Stars panelist Yves Rebetez’s Desert Island pick. (We’ll look at this theme in more depth in an upcoming column.)
Finally, let’s not forget the always enjoyable option of simply spending the windfall. For most of us, a vacation abroad is not possible right now but staycations are eminently doable. If you’re spending a lot of time at home, you could do what we did with our $300 OAS COVID bonuses, and plant some trees in your backyard. Then you can literally watch your money grow!
MORE BY JONATHAN CHEVREAU:
- Unpacking the new work-from-home ETFs
- 12 top personal finance books to read this summer
- Best ETFs in Canada for 2020
- Should retirees reduce RRIF payments during COVID-19?