Talks of a potential recession in the UK have been rife for several months. Given the current political uncertainty, and the decline in the value of the pound over the past two and a half years, it is unsurprising that a number of Brits are concerned about what a potential recession would mean for them. Key institutions such as the Bank of England, and the National Institute for Economic and Social Research have put their odds at anywhere between a 1 in 10 and a 1 in 3 chance that there will be a recession within the next year (some say the UK is already in one!), so it is easy to understand why people may be concerned. Whilst a recession may be unavoidable, there are several steps that you can take to prepare for what may be on the horizon, in order to protect you, your loved ones, and your pocket. This article will include a few top tips that may help you to prepare for when the ‘what if’ becomes a reality.
- Cut your monthly expenditure
A potential recession could, at its worst, mean widespread job losses or the reduction of hours. However, during a recession, regular living expenses such as rent, and any debt repayments you may owe will not cease. It is therefore advisable to start reducing your spending now in preparation for what could be a difficult few months. Cutting your monthly expenditure doesn’t have to mean making life altering changes that will significantly impact your happiness. Tasks such as cancelling subscriptions for gyms or television channels that you don’t use, changing energy or phone providers, or even changing which supermarkets you shop at are small steps can really make a difference to how much money you spend each month. This will mean that you are able to not only adjust to living off a smaller amount per month, but also be able to set aside more money for emergency savings.
- Build your ‘rainy day’ fund
Having an emergency fund stashed away in savings is essential if faced with recession. You may need as much as three to six months income (some experts argue 8 months’ salary would be even better) in savings in order to ensure that you will be able to survive if there were to be a dramatic change in your financial situation, such as a job loss or a reduction in hours, bonuses or financial benefits such as additional insurance packages. If you don’t yet have an emergency savings fund, start one now. In addition to having a savings fund, ensure that you are storing your savings in an account which gives you the highest yield or the most reward. By keeping your money in a low yield account, you are losing out on the money that could otherwise be earned in a higher-interest account.
- Supplement your income
On top of the two tips above, think about exploring additional ways to supplement your income if you are concerned about what may happen to you financially during a recession. This may include selling some goods that you may not want or use any more or may involve utilising some of your time offering your skills through something such as tutoring or consulting. Alternatively, if you are in a job that offers paid overtime, or you are close to a promotion, then this could be a good use of your time to focus on your existing job and earn more from that.
- Pay off any high interest debt
Paying off any of your high interest debts is a good way to protect yourself in case of a recession. Anything with an interest rate above 7%, such as credit cards, puts your original debt at risk of skyrocketing out of control, which would put additional pressure on your budget when you may already be struggling to keep afloat. By paying it off in advance, you can rest assured that your debts will not spiral out of control and you can focus on covering the daily costs of living.
- Put major purchases on hold
In line with building your savings, if a recession looks imminent, don’t start throwing down money for large purchases like a new car, a new home or renovating your current one. Just because prices on goods and the cost of borrowing money may be lower before and during a recession, it does not mean that you should strike whilst the iron’s hot. Your income may also decrease when a recession hits, making it all the more difficult to rebound from a big purchase or to repay a loan. You may eventually need the money that you would have otherwise spent to cover the cost of living if you do not have a salary.
- Don’t alter your investment plans
It may seem counterintuitive to keep investing during a recession. When everyone else is panicking about a falling stock market, you must remind yourself that it’s impossible to effectively time the market. This means that to give your investments the best chance of performing again, you will need to keep investing regularly and according to your plans made before the period of recession. Make sure that you continue to invest so that you are ready for success when the recovery happens.
- Boost your credit score
It may seem unnecessary to be concerned about your credit score during a recession. However, life may throw some unexpected curve balls your way which may require you to seek a loan during a period of financial uncertainty. During a recession, banks will only lend to the strongest borrowers, which means that if you don’t have a strong credit score, you may not stand a chance of getting one. Check your credit score regularly (but not too regularly!) so that you can notice if there are any issues.
The difficulty with a period of recession is that you won’t be able to change the situation, but it is important to remember that all good investors have ups and downs in their journeys to success. By preventative planning and sensible, informed decision-making, you are much more likely to come out of the other side of a recession unscathed than those who panic and make rash decisions. Always seek advice if you are unsure and take each wave as it comes.