The last few years have shown the British people are a hardy lot and have the ability to succeed during the trickiest of periods.
The UK might be about to face its third major recession since the turn of the millennium but that doesn’t mean there aren’t options available to individuals who plan ahead and prepare themselves to navigate the coming storm.
You will likely have already experienced two previous recessions this century and this one will be no different. However, if you still have concerns, then getting the right advice could help assuage those worries.
Discover a few key ways you can protect your finances from the impending recession and stay on course to meet your long-term goals.
- Start with the obvious by reducing your outgoings
The first step in preparing yourself for a recession is to review your monthly budget. As much as you might not want to make cuts, it can be prudent during uncertain times.
Take account of all your monthly outgoings and determine what expenses are essential and which can be stopped to make short-term savings.
You don’t need to remove all the luxuries from your life but making sure you’re living within your means can provide a financial buffer during a recession.
Use a carefully formatted spreadsheet or a budgeting app to keep your finances in balance and ensure you always have enough money for key bills.
- Make sure you protect your savings and have an emergency fund set aside
According to the Office for National Statistics (ONS) inflation is 10.1% in the year to July 2022. High inflation has an eroding effect on the “real” value of savings. For example, an outlay of £500 on goods and services a year ago would cost you £550.50 today at the current rate of inflation.
So, it’s important to not allow your cash to stagnate in a savings account with interest rates that are being outpaced by rising inflation.
While keeping your cash in savings accounts can erode its real value, you will usually have a need to retain some easy access cash savings. You will normally want at least three months’ worth of cash set aside in an easy access savings account with the best possible interest rates as a form of emergency fund.
Your contingency savings should be there to cover essential bills such as rent, utilities, taxes, and key household outgoings.
Any surplus cash savings could be invested to potentially protect them against the negative effects of inflation.
- Protect your income with insurance
A recession is likely to mean rising unemployment and job losses. This is Money reports that over a quarter of households would struggle to cover their household bills within one month of losing their income.
As previously mentioned, saving for an emergency fund is key. Beyond that, another way you can protect your essential outgoings is by taking out income protection. This valuable protection typically provides financial support in the event of illness and an inability to work, but certain options also protect against redundancy.
The cost of cover depends on your health and lifestyle, as well as the desired length of coverage. Cheaper options cover short-term windows of one, two or five years, while the most expensive policies can cover your annual income through to retirement and beyond.
A policy might be an additional budgetary expense, but if you have an inkling that redundancies could be possible then it could give you some much needed peace of mind and protection should the worst occur.
- Diversify your income with “side hustles”
Another way to protect yourself against a sudden loss of income is by creating additional income streams through “side hustles”.
According to research by Aviva, 1 in 5 Britons have taken on a side hustle since the start of the pandemic in March 2020.
Dependent on the terms of your employment, you might be able to work a second job utilising some of your free time to work as a consultant, or to start your own business.
Otherwise, making the most of your property can provide you with additional income.
Whether that involves converting part of your property to act as an Airbnb or acquiring buy-to-let properties, rental income can be an extremely stable additional income stream.
- Get ahead of rising interest rates and review your debt arrangements
As inflation rises, typically so do interest rates. This is usually beneficial for savers, but detrimental to anyone with variable-rate debts.
If you have a loan, credit card or mortgage you may well see your monthly instalments rise as interest rates increase.
Consolidating loans and credit cards under a fixed-interest loan agreement can help protect you against increasing debt repayments.
Similarly for mortgages, it can be beneficial to consider a fixed-rate mortgage rather than a variable agreement.
Review your debts and consider making changes if you’re exposed to the negative effects of rising interest rates.
- Don’t forget to review your investment strategy in a calm manner
Investing your savings in the stock market is typically riskier than traditional savings but might offer returns that are potentially better equipped to keep up with rising inflation.
A recession can sound scary and might elicit an emotional, knee-jerk reaction. The words “sell, sell, sell” might reverberate around your head as your newsfeed is inundated with unnerving headlines.
It’s important to remember that a recession isn’t the same as a market crash. Stock prices are unlikely to plummet and will likely ebb and flow.
The market can be volatile during a recession but also very lucrative, as many stocks will see their prices go down, which could allow you to buy more shares or fund units for a smaller investment.
Over the long term, this strategy could help you to reap significant benefits when the markets bounce back.
figures from the 10 years after the 2008 recession showed an 11% growth in the UK economy after the initial dip in 2008. The economy generally recovers given time.
If you have any worries about your portfolio, then consult a financial planner to discuss the best steps to protect your investments.
Get in touch
A recession can be a worrying time for even the most financially prudent of individuals. But don’t allow your emotions to sway you against your better judgement.
Consulting a financial planner can give you the reassurance that your savings are secure as well as alleviating any unwanted stress.
Contact us by email at email@example.com or call us on 0345 505 3500 to seek advice on your financial plans.
Investments carry risk. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.