How to prepare your finances for a recession

There is no question that the UK, and the rest of the planet, is facing a recession like nothing else.

In a speech at the end of last week, Kristalina Georgieva, managing director of the International Monetary Fund, said it would be worst economic fallout since the Great Depression.

“We are still faced with extraordinary uncertainty about the depth and duration of this crisis. It is already clear, however, that global growth will turn sharply negative in 2020.

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“Just three months ago, we expected positive per capita income growth in over 160 of our member countries in 2020. Today, that number has been turned on its head: we now project that over 170 countries will experience negative per capita income growth this year,” she warned.

“The bleak outlook applies to advanced and developing economies alike. This crisis knows no boundaries. Everybody hurts.”

Here, the British Chambers of Commerce reckons that at the end of March, 18 per cent of businesses had less than a month’s worth of cash in reserve and another 44 per cent had between and one and three months’ worth to see them through.

While millions have already been hit with job losses, pay cuts and furlough, it is clear that there will be much more to come.

“As anyone who lived through the UK’s last recession will remember, it brought a rise in unemployment, in personal debt and a crunch on earnings,” says Laura Suter, personal finance analyst at investment platform AJ Bell.

“In the past recession it took five years for the UK economy to get back to its pre-recession size, showing how long many households need to prepare to tighten their belts for.”

But while so much feels out of our control right now, there are plans you can put in place to wrestle it back. Especially at a time when every change will help.

Address your debts

If you still have spare cash – even if it is only a pound or two – focus on paying down debt in order of cost. Find the debt with the highest interest rate and start paying that off first before moving on to the next highest rate. Removing these burdens could help if times get tougher.

“However, many people won’t be in a position where they have spare cash to be able to funnel into paying off debt,” Suter acknowledges. “If that’s the case your focus should be on reducing the cost of any debt. Interest rates are at record lows, which means the cost of debt has fallen slightly too.

“Those with better credit records will find they have more options open to them, but moving your debt to a 0 per cent credit card or a personal loan on a cheaper interest rate could be a good option, and means you can use more of your capital to pay down the actual debt rather than just paying off the interest.”

If you have already experienced a financial hit thanks to Covid-19, a huge raft of extraordinary emergency measures have been put in place to try to reduce the impact.

The latest of these include: offering a temporary payment freeze on loans and credit cards for up to three months; and an additional £500 overdraft at 0 per cent on your main personal current account if you already have an overdraft facility. The full range of measures were due to kick in by 14 April.

Be careful with these and only take them if really necessary as the interest will still accrue, meaning it could cost you more over the life of the loan.

Build up an emergency pot

Businesses certainly aren’t alone in their vulnerability to financial shock. Half the UK workforce say they don’t have savings to fall back on if they were to lose their job as a result of an economic downturn, warns research agency Opinium.

And precarious workers – defined as the self-employed, freelance workers, or gig workers – are particularly vulnerable. Only a third have any money set aside to live on if their income dries up.

But ideally, financial experts advise, you should have between three and six months’ worth of outgoings set aside for rainy days or emergencies (like this one). The total should reflect housing costs, utilities, groceries and any other essentials or non-discretionary spends.

It often looks like a huge number but just put away anything that you can. Something is better than nothing right now.

This money should be available immediately, so put it in an easy-access cash account rather than one where access to the money is restricted. But find the one that’s paying the highest rate of interest – about 1.3 per cent at the moment.

Slash your outgoings 

“A good way to generate some extra cash each month, and get your finances as lean as possible, is to use some spare time to check you’re paying the cheapest price for all your services,” suggests Suter.

As housing costs eat up the most, start there, particularly with mortgages, as switching to the best deal available in this ultra-low interest rate environment could shave hundreds of pounds off your monthly bills. Check your current interest rate – if you’re on a standard variable rate (SVR) you’ll be paying far more in interest than you need to.

Securing a new deal will depend on the equity you have in your home, the value of your home and whether you have a healthy income against your typical bills. Some lenders have pulled certain mortgage products as a result of the coronavirus crisis so a mortgage broker may be able to help you navigate the current climate.

“If you’re worried about losing your job in the future then you might want to extend the term of your mortgage so your monthly repayments are lower. Clearly this will cost you more in the long run, as you’ll be paying interest on the debt for longer, so you need to weigh up the pros and cons.

“Once you’ve tackled that big outgoing, look at unwanted direct debits or bills that have crept up in price. Whether it’s switching to a cheaper energy deal, assessing whether you really need five different streaming services or realising that your Sky package has shot up in price, there’s lots you can do just by going on a comparison website and hunting for a new deal,” adds Suter.

“Previously we all claimed we didn’t have time to do these life admin tasks, but now we have no excuses.”

Finally, as you’re cutting back, beware of the infamous “lifestyle creep”. As workers gradually pick up greater salaries with experience so the everyday spend increases very gradually.

If you’re living within your means, there’s nothing wrong with buying slightly nicer clothes or going on pricier holidays (remember those?) but being aware of how you’ve upped your spend will help cut back and save cash if you need to.