According to Statistics Canada, 52% of Canadians now live alone.[i] Financially, there are upsides to being single – if you want to spend it, it’s yours to spend. You don’t need to consider someone else’s preferences. If you want to retire in a certain area, you can choose to do so. If a better job opportunity presents itself across the country, you don’t have to consider the impact on someone else’s career. There are also risks. When it’s all on you there is less room for error as there isn’t someone else’s savings or income to fall back on. That means, in order to have sound finances and achieve a lifetime of financial independence, a single person needs to have heightened sensitivity to the circumstances that might negatively impact their financial future and structure their finances accordingly.
The biggest asset any of us have is our ability to earn an income. In a one-person household, an interruption to income can have a profound affect. Mary was in her mid 40’s, had worked her way up and was a Director at the company she worked for. She walked into her office one Thursday morning, coffee in hand and was just settling in to review her emails when the VP she reported to called her into a meeting room. Taken completely by surprise, she was informed the company was going through a restructuring and her position was being eliminated - effective immediately. Mary was in shock. To this day, she has no recollection of her journey home after that fateful meeting. What she does remember is the overwhelming fear she felt knowing that in four short months, when her severance ran out, she wouldn’t have any income. Once the shock wore off, anger set in, and then, not too long after came the resolve to do whatever she could to make sure she would never find herself in that situation again.
Mary got to work looking for a new job right away. She knew she needed one, there was the mortgage to pay, a car payment, property taxes, utilities and groceries. Even with cutting out the non-essential spending, she figured she could only go about six months without a job before she would have to start dipping into her long-term savings. After about five months, Mary started a new job, but she didn’t forget her vow to never find herself in that situation again. And so Mary started a side job, in an area of interest to her that she could do on her own schedule. While the motivation to take on a second job came from her desire to have a second income just in case something happened to her main job, she made the decision to save everything she made from it.
Fortunately, Mary came through her job loss experience financially unscathed. Her severance, along with careful expense management, got her through. There where three things that Mary’s experience taught her:
- The need for an emergency fund –We never know when a surprise is going to come our way. An emergency fund can be a first line of defence in the event of a job loss. Recommendations vary on how much emergency savings one should have, but six months expenses is a good starting point.
- Protect your income – regardless if you are working or retired, your income is what gives you financial stability and independence. While Mary’s income interruption happened because of a job loss, it got her thinking about other reasons she might be out of an income. Disability / health reasons was one. Making sure she had adequate disability and critical illness insurance, just in case, became a priority once she started working again.
- The Value of Multiple Income Streams – while diversification is considered to be the number one risk management tool for investing, it is also a great tool for protecting your income, while you are working and even when you are retired. Mary took on a side job, that allowed her to both save more and provide her with a back up plan, just in case she ever experiences a job loss again. If she is able to continue working uninterrupted, but continues to save that extra income, Mary has been able to accelerate her retirement plans.
A loss of income can destroy a financial future. Single person households feel this risk more acutely, and it is a circumstance that should be planned for. Having an emergency fund and adequate insurance, just in case, serve as the foundation for protecting yourself financially. Finding ways to increase the number of income streams you have can be another way to protect your cash flow, and if you choose to save that extra income, can accelerate your future plans or even allow for new opportunities. When you are single, financially it is all on you. As you look at a achieve a lifetime of financial independence, protecting your income is paramount.