You can’t single-handedly change the state of the economy but you are in control of your own money. By acting now, you can take steps to “recession proof” your finances to give yourself some security should the worst happen.
Below are some of the ways you can strengthen your financial position to help you prepare for the challenges a recession may bring.
Review your spending habits
Before anything else, you should conduct an MOT of your finances to highlight exactly where your money is going each month. From this, you should then see where you can make savings and what you need to prioritise in your budget plan.
Alex Price, Director of Financial Planning at Charles Stanley explains the importance of getting a grip on your spending:
“Many of us dread sitting down and going through our finances, but without doing so it can be difficult to keep up with how much is coming in and out of your account. Creating a budget sheet that lists everything in one place will also help you to spot where you can cut back.
“At a time when we have so many subscriptions and financial products it can be hard to keep track. Going through what contracts you have in place will help you spot whether you are overspending, where you can economise or get a better deal and check that you’re getting what you’re paying for.”
Pay off debt
If you’re earning, you should aim to tackle your debt, focusing particularly on any high-cost debts like overdrafts or credit cards. By getting your debt under control and paying off as much as you can while you can afford to, you will give yourself some breathing space if you run into financial difficulty later on.
Once you understand how much you owe and have decided which debts you should prioritise, you can work out how much extra you can pay towards clearing your debts and budget accordingly.
You could also see if you can reduce the cost of your debt by transferring and/or consolidating to a deal with lower interest rates, such as a 0% balance transfer credit card. However, if you consider this option you need to be sure you can clear the debt before the 0% deal runs out. Once it does, the credit card will start charging you interest, usually at a much higher rate than other forms of lending. Credit cards are solutions for short-term borrowing, not long-term.
Build an emergency fund
However much you earn and whatever industry you work in, it’s a good idea to save up an emergency fund to give you a financial buffer should you lose your job or face unexpected costs in the future.
Even if you are focusing on paying off debt, it’s just as important to build up your savings.
If you use all your spare cash to clear debt and then find yourself out of work, you will have less debt to repay but also no savings to tide you over while you find a new job. This may result in you taking out more debt to fund your everyday expenses, which will undo your previous hard work.
Ideally, you should aim to build up a financial cushion that can cover expenses over 3-6 months, but any amount you manage to save is better than nothing. However, this can be easier said than done, as Simon Rabin, CEO and Founder at Chip, underlines:
“Of course, life isn't this simple and it can be hard to have any money at all put aside, let alone two months’ salary. And millions of people in the UK have less than £100 saved up, which leaves them exposed to financial shocks.”
“One of my inspirations for Chip was to have a tool that would make sure people could do this without needing to think about it. We’ve found that the average Chip saver can put aside around £1,800 a year, without noticing it. Which can be a very useful amount of money if you find yourself in a pinch.
“The reality is there’s only so much you can actually plan for in this life. Whether it’s something that seems trivial, like needing to call in an emergency locksmith, or something as terrible as serious illness or injury, unless you have a crystal ball you don’t know when life will throw any of this at you. But something that will always help is having some money put aside.”
Cut your spending and save
To find the spare cash to pay off your debts and build an emergency fund, you will need to work out some ways to save money.
A simple way to cut your spending is to identify any memberships or subscriptions that you no longer need, whether they’re for a streaming platform, the gym, or a magazine.
Cutting your everyday expenditure can be more difficult, but it doesn’t necessarily require any drastic measures. To start with, you will need to create a realistic and achievable budget that aims to eliminate as much unnecessary expenditure as possible, although this doesn’t mean you need to completely cut out non-essentials! You can set aside a sum of money for luxuries, as budgeting for little treats can help you keep to the rest of your goals.
Read more on how you can incorporate a minimalist financial approach into your budget.
Brian Murphy, Head of Lending at Mortgage Advice Bureau, offers some more tips on how to save money in a recession:
“Saving doesn’t need to be daunting and it doesn’t mean you have to save huge chunks of money at a time. Even saving small amounts here and there will make a difference to long-term savings goals. It can be as simple as buying one less take-out coffee a week or going for a less expensive option at the supermarket. Some banks also provide the option of ‘round-ups’ meaning if, for example, you spend £2.83 on an item, the account will ‘round-up’ the transaction and put aside 17p in a separate pot. This way you can save little and often without even realising.”
A reliable way to ensure you achieve your savings goals is to set up a direct debit to transfer money into your savings account straight after you get paid. This makes saving a priority and removes the temptation to spend your savings elsewhere.
Find cheaper deals
“Homeowners have many comparison services available online to quickly find out what the going rate is for their type of property and household size. They’re quick and easy to use and there’s no excuse for not knowing if you’re overspending. It’s a great first step to getting on top of your household’s finances.
“The time to consider switching or thinking about your energy contract is always now! Generally speaking, the best time to switch is before winter, so when demand isn’t as high. However, it is a process that can begin any time at all.
“Look at your last year of bills - are they what you expected? If not, then a better deal is out there. Armed with the knowledge of what you’ve been paying, shop around online to see what offers are out there to tempt you to switch. Do your due diligence and be confident in your decision. There is no reason not to show you prices when you are browsing - so anywhere that isn’t showing prices can be counted out straight away.”
Improve your credit score
It is also worth checking your credit score and improving it where possible. By consistently paying your bills and making your debt repayments, you should build up your rating and improve your chances of getting affordable credit in the future, should you need it.
Ercan Demiralay, Partner at Wellers, emphasises the importance of checking your credit score:
“I would one hundred percent advise people to make the most of free platforms like Experian, or at least use the free trial facilities. They give you an insight behind the scenes of your finances and offer advice on how to improve them. To put this into a real-life example, I was chatting to a friend who kept being told he had a poor credit rating. He paid his mortgage and bills on time, every month, so we took a look at his history on Experian. It turned out that he had an unpaid parking ticket that he was unaware of, that was having a huge impact on his credit rating.”
Diversify your income
Having multiple income streams can provide you with some extra protection during a recession.
If you rely on just one source of income for all your needs, you are in a more vulnerable position as you would have nothing to fall back on if this was reduced or removed.
So, it’s worth finding ways to earn extra money, whether that’s from a second job, freelance work, tutoring, or even activities like dog walking, babysitting, or house sitting. Having a “side hustle” means that, even if you lose your job, you would still have some money coming in.
You may also want to research various passive income streams, to see if they are a viable option for you. For example, you could rent a room in your house (if your landlord or mortgage provider allows this), or, if applicable, invest in a buy-to-let property.
A recession could be a good time to buy property as prices are often lower and mortgage rates can be low (depending on your circumstances and credit history). Until 31st March 2021 there is also a cut in stamp duty, so buyers can benefit from reduced rates on their property purchase.
However, you should only consider a buy-to-let mortgage if your financial situation means you can realistically and comfortably afford it.
Don’t neglect the long-term
Michelle Gribbin, Chief Investment Officer at Profile Pensions, underlines how we shouldn’t be neglecting our pension funds and our long-term finances, even during a recession:
“During times of financial uncertainty such as a recession, we know that most people will be primarily concerned with the more immediate demands on their money such as how they are going to pay their bills. While this is only natural, we would urge consumers to take the time to be proactive with their pension provision and make sure that their money is working as hard as possible.
“This means getting to know your investments, checking that your risk levels are appropriate and that your money is spread over a variety of markets and asset classes. Personal circumstances will also play a part and those who are getting closer to retirement should think about the possibility of holding off until markets have had a chance to recover. For others, it’s worth considering whether you might be able to up your contributions while markets have dipped, offering an opportunity to buy shares at a lower price.
“History tells us that market recovery will come, in the meantime we urge people to consider all of the options available, or seek impartial advice, in order to make sure they are setting themselves up as well as possible for the future.”
For more advice and guidance on how to manage your money, you can consult a professional financial advisor.