Oil is sitting at under $40 a barrel. If that has you worried about your job in Alberta, good – you should be worried as the longer this lasts, the higher the unemployment rate is going to go. If you look at a long term inflation adjusted graph of oil prices, it was only 15 years ago we saw an extended period of under $40 oil, so be prepared for history to repeat itself. For those of you thinking this is really bad right now – you have seen nothing yet. Call me when unemployment rates in Alberta crosses 10%, and stays there.
But what can you do to prepare for a possible long period of unemployment? Don’t be relying on EI, if you’ve been spending like it’s going out of style, you’re going to find you’re going in the hole, just slower than you might have. EI amounts to a maximum of $2270/month in 2015. Ask yourself if you can live on that. If the answer is “I don’t know” you really need to keep reading this!
What can you do, now, while you still have that nice cushy income? It comes down to “one simple trick” : REDUCE YOUR BURN RATE.
What am I talking about when I say ‘burn rate’? I am talking about any expense you have to pay to keep going. This includes mortgage/rent, utilities, insurance, BASIC food, etc. I’m NOT talking about all the stupid things you buy every month you didn’t need. I’m assuming you’re scared enough to stop doing stupid stuff like go on an Mexican vacation when you can’t scrape up $5K CASH to pay for an emergency. If think not having a $5K buffer is perfectly fine, I can’t help you. Go back to Facebook and plan you next vacation with all your credit card wielding vacation buddies.
Credit cards need a monthly minimum payment and you are being so screwed on interest – its criminal. PAY THOSE SUCKERS OFF. Keep one for emergencies and burn the rest. Always pay the one card off. This is your top priority if you consistently carry a monthly balance. Just think of every $1K costing you $20 bucks a month for NOTHING. If you find you can control your spending, you may want to buy everything on one card, and that card should be one that gives you something back, preferably cash. Not only do you get a bit back, but you have one bill that shows you what you spent – without having to do any extra budget work. You need to track what you spend, on credit card or by accounting package/spreadsheet/notebook. You will quickly find where all the money goes if you do this. You are looking for things like eating out at restaurants, new clothes you didn’t really need to buy, electronics etc. These are not burn rate items, they are extras you need to cut out now in order to get a little wad of cash going to cover your ass if you do fall off the oil money tree. I know a lot of people recommend burning all credit cards and living off of cash. Cash is a pain, I say. If that is what it takes to control your discretionary spending, do what you have to; but I think forcing yourself to track everything you spend will teach you just as well not to spend beyond your means. Ever think about reading “The Wealthy Barber”? I give you the Coles Notes version: It’s mostly about learning to NOT spend all your money, then covers the basics of what to do now that you’re actually saving money.
If you’ve been really good with your money during the last oil boom, you may have taken aim at your mortgage and have it paid off, or significantly paid down. Good for you. Obviously, no mortgage gets rid of the biggest burn rate item you likely have, and if you’ve paid down the sucker a lot, you may be able to re-negotiate a longer term to pay off the remaining part should the hammer fall. But if you have a wad of cash, you may want hang onto it for now – interest rates are still low, and you can always pay down later should the good times roll again. If you are up for renewal, you may want to extend things out a bit, get a lower monthly payment, and hold onto that cash. Make sure you have flexible terms to be able to add to that monthly payment. If you are renting, you may actually have it a bit easier to cut down this big burn item. Go looking to move to cheaper digs. Or threaten to move to cheaper digs and see if you can get a better rate if you’re up on your term. You may have some toys that are actually assets. Have some quads? Sell them. Expensive jewelry? Ditto. Your goal is to get into some cash to cover your ass, then have a low burn rate so that cash lasts as long as possible.
Sell your house and buy something cheaper? I think the boat has sailed on that one already if you’re up to your gills in mortgage, and have bought in the last 5 years. You’re going to be trying to hang on and pray interest rates don’t go up. That being said, if you can take the hit, it might be worth considering to downsize now while house prices have not dropped too much yet.
Other payments: If I was sitting on a 70K Mercedes on payments, I would be looking to sell it right now. I’d be pricing aggressively, because if you think it’s hard selling things now, try that if the unemployment rate in the province doubles again. Replace that with something sub $10K in a cheap to run econobox. We are talking about 5-10 year old Civic, Corola, Focus type vehicles. Very boring. Hopefully you have some other toys to sell so you can buy this thing cash. Remember, no car payments equals lower burn rate, and cheap to drive, and simple equals fewer repair bills.
Cell phones: $80/month is too much, even $50 is pushing it. Acceptable if it’s your only device (no computer and no land line), but I’d be getting WIND’s $25/month plan and be frugal on the data so you don’t go over the $5/100mb. If you can’t fit in that, get the $35 unlimited plan. Yes, the coverage sucks, but you’re trying to save, and you’re not traveling, so who cares about roaming. If you’re not in a WIND area, there are budget pay as you go plans that have a similar cost, same idea. Still have a land line? That’s $32 a month with Telus you can cut your burn rate by. Ditto with Shaw home phone.
TV: Cut the cord. If you can’t cut the cord, at least trim down to basic cable. Find something better to do with your life if you get bored of basic cable.
Internet: Cut back to the cheapest service. If you really want streaming video, the second cheapest service will do in most cases. There will be no multiple streaming going on in the house anymore. See my point about TV. Shaw basic is $53/month currently. A nice side bonus is if you are switching providers, you can save more for the first 6 months. Don’t be tempted by the free extras. Decline right away so you don’t have to cut the cord when they want you to start paying. Shaw’s second cheapest internet plan is $63 – perfectly fine for video if you don’t push it with mega hours or multiple streams, and way cheaper than basic cable.
Car Insurance: You now have an econobox. You might want to just have liability coverage. Just remember you’re paying for all damage to your car in an accident situation.
House Insurance: You got rid of the toys. Having “Luxury Insurance” added is kind of pointless.
Utilities: Get a programmable thermometer and install it yourself. Learn to use it. Will pay for itself in a winter season. Fix leaky toilets. Keep the heat down more if you can take it. Don’t forget to pay for them on your credit card so you can reclaim your cash back. If you have a toaster oven / crock pot, use them more – they are cheaper than turning on the stove. Forget about watering you lawn in the summer. These won’t add up to much savings, but every bit counts!
Taxes: Do them yourself it’s not that hard and you might learn something about how much you actually are taxed. Free programs online make it easy in Canada. I’m assuming do don’t have much in terms of assets, so you have no excuse of “maximizing your tax savings” that’s for people who have money and need to keep the government from getting more of it.
Clothes: I have no problem with this one as I hate clothes shopping, but I know some people get out of hand really quick with this one. First rule of clothing shopping: Buy everything on sale. If it doesn’t go on sale, it’s probably on the cheap end already, which brings me to my second rule: never buy by brand (unless deeply discounted). Third rule of clothing shopping: Don’t buy just because it’s on sale, buy because you need it. If you have no discipline here, I suggest you only go shopping when you need something, and try to stick with ONLY buying what you need. I get a $250 Bay Card every year from my credit card that covers about 1/2 of my clothing budget, and I still have more clothes than I need. There are exceptions where getting quality will pay sometimes, but that’s much more difficult to figure out. You also may have a full clothes closet that will cover you until the times are good anyways.
Food: OK, so you’ve stopped eating out. That’s the easy one. If you’ve never thought about saving on your groceries, I am going to try and give you the very short version. There are many ways to save on grocery, but don’t go too nuts – you still need to eat healthy and having some “treats” in the house is a moral booster both for while you’re working and if you’re trying to outlast a long unemployment!
– Make a list, buy what you need. The isle with the pop and snacks should be skipped completely, although as I said above, getting a treat or two is worth the moral boost in my opinion.
– Watch sales. Anything that stores well should be bought in volume when a good sale comes on. Don’t go buying things you don’t use normally because they are on sale. Toilet paper get purchased in 3 month supply volumes in my house, – always a sale with a couple of bucks off within that period again – just one example.
– Buy frozen. Vegetables are expensive these days. Frozen is perfectly fine nutritionally and much cheaper. Fruit you’re stuck with fresh for the most part, but try to stick with what’s in season and cheap that week.
– Cut back on meat. Learn to love beans and lentils. When buying meat, there is a large difference in price between “tenderloin” and “inside round”. Chicken leg and back is cheap and filling. More Pork, less Beef. Get a cook book \ internet cooking site and cook something new to replace that restaurant hankering you may be having.
– Day old or the expiring bin is just fine for the most part. I only avoid Milk as I really don’t want to deal with sour Milk. “Best before” means exactly that, it will still be fine to eat as long as it’s close. I consider best before dates for most dry goods and cans to be absurd – just a way to encourage you to throw it out and buy more.
– I hate coupons, but again, if it is something you need to buy anyways, they can save you a bit too. Be careful to compare the price of the brand with the coupon discount versus the no-name brand – sometimes savings is just a mirage.
I suggest once you have your spending budget in line that you actually come up with a “fun money” number. This is money beyond your burn rate you can spend every month. Want that new iPhone? Only have a $200/month fun money budget? You’re saving your fun money for a while. While you’re working, you can keep this number higher. It may have to go down to zero if things get dire.
In terms of following my advice, if you already can honestly pull $5K cash out tomorrow (no credit required), you’re one leg up. If you can live 6 months off of savings, you’re two legs up. You just might want to tighten the screws a bit. If you actually have a year’s savings you can draw on (cash and short term investment conversion) you likely do a lot of what I’m talking about here already and don’t need my advice. Good for you!
I hope I don’t have to point anyone I know to this blog article, but it’s here for that reason, and for anyone else that is trying to actually be frugal for the first time in their lives. Happy 2016 and here’s hoping the oil prices go up again before 2017!