COVID is fading! All is well. Or is it?
by Tim St Vincent
COVID-19 is definitely fading. Good arguments can be made that a second wave is likely to hit in the fall but many people are celebrating the progress we have made. As well they should. Many are thinking that their financial worries are over and Canadian Emergency Response Benefit (CERB) and payment deferrals have saved us all!
Hang on a second. I have several concerns with that!
First, there may very well be a second wave, potentially one even worse than the first. Let’s not lose sight of that, but I can put it aside for now. Let’s talk about CERB and the payment deferrals. Yes, they were/are timely and excellent programs, but there are several things to consider that many are forgetting
1. CERB income is taxable
For every one dollar in CERB money, I would advise putting aside $0.33 for taxes. The tax bill will come. It will be delayed, but it will come. At a rate of $0.33/$1.00 (a 33 per cent tax rate) that means for every $2000 paymen,t you need to put aside $660.00. If you accepted the entire CERB amount of $8000 you should have put aside $2,640 for taxes. Did you? Probably not. Don’t feel bad, most everyone else didn’t either. That means that the impact of this won’t hit you this year, but it will definitely hit you by April of next year, when you get your tax bill! Better start saving.
2. Payment deferrals
A great idea if a) you understood how they worked and b) only took what you needed. Many took more than what we needed and didn’t fully understand how they worked. Let’s say we needed some help. No shame in that; many of us needed some assistance. If you needed only a one-month deferral to get by, but you figured “what the heck, they are offering six months, so let’s take advantage and go for the full six months,” you may not realize there is a bill coming for this too. No, not a tax bill, but an interest deferral bill. You see, an interest deferral is not an interest holiday, the interest is not forgiven, it’s only deferred. That means they will wait or defer on the collection of it, but they do not forgive it. Not only that, but for the most part, what they do is add on the deferred interest to the amount owed, then charge interest on the interest. In my March 16th article I gave an example of how this could add over $11,500 to a mortgage! Quite a surprise if you weren’t expecting it. An even worse surprise if all you needed was a one-month deferral and decided to apply for six months.
3. What happens when the CERB money and the deferrals stop?
In July, those who participated in the first round of CERB payments will no longer be eligible for CERB funds. How will they manage their finances then without the government assistance? At some point in time, the deferrals will stop and the bills will come due.
4. Time to talk about that second wave
It may very well come and it may be here by fall. The good news is that we have time to prepare for the second wave, should it come. As always the best solution to problems like this revolve around proper budgeting. Half of the country has no budget. Half of the country is struggling financially. That can’t be a coincidence.
If you are one of those who are struggling, know that you are not alone. Approximately 50 per cent of the country was struggling with their finances before COVID-19 made an appearance. I suspect it is much higher now. If you need help, reach out to us or any qualified non-profit credit counselling agency. We are here to help.
Tim St Vincent is a retired CFP and is a Certified Educator in Personal Finance with the Credit Counselling Society, a Non-Profit organization. If you wish to contact Tim for a free workshop or webinar, have a question or would like to submit an article idea please contact Tim at 1-888-527-8999 ext 1330. You can also contact the Credit Counselling Society for further information or assistance at 1-888-527-8999 or visit www.nomoredebts.org or www.mymoneycoach.ca.