How to recession proof your finances
The cost of living crisis
At time of writing, the UK has just appointed Rishi Sunak as Prime Minister and in his opening statement Rishi talked about a ‘profound economic crisis’ facing the UK. Most of us will be feeling the rapid rise in prices that we are paying. A supermarket shop is costing more, filling the car is costing what feels like a small fortune and upon using the heating last week I promptly turned it off when I saw the display on the smart meter. There is a lot of chatter in the news about recession. Will there be one? Are we already in one? I’m not an economist and I’m not professing to be an expert in this area but putting the scare-mongering press aside, it certainly feels like a recession is possible.
What is a recession?
Put simply, a recession is a significant downturn in the economy. It’s most commonly characterised by two consecutive quarters where GDP (gross domestic product) has declined. In layman’s terms it means as a country our production of goods and services along with consumer demand are in decline. As a result unemployment may increase as businesses are no longer able to afford the cost of their workforce.
The economy tends to work in cycles. We have downturns, followed by upturns and periods of stability before we once again have a downturn. If we do have a recession, it certainly isn’t the first and I doubt it will be the last.
What impact will a recession have on me?
Every situation is unique, but typically in a recession these are some of the things you may face:
- If you are employed, your company may decide not to give you a pay rise as they try to control costs and protect jobs;
- The risk of redundancy and a period of unemployment increases. As a result there may be less promotion opportunities and job opportunities available to you;
- If you are self-employed, you may see less demand for your products or services meaning your income reduces;
- Some businesses fail;
- You could see your debt increase or savings dwindle as it becomes harder to manage;
- Some people will be made bankrupt.
Those who tend to get through recessions more easily are those with greater levels of wealth, higher levels of disposable income along with those who have guaranteed levels of income or income from diversified sources.
Stay in control
Financial worries can have a significant impact not only financially but also mentally, emotionally and physically. Unless you have surplus income or a good savings cushion behind you, not knowing how you will manage from one month to the next is incredibly stressful.
Often this stress is a result of feeling like you’ve lost control and that you don’t have the ability to get to where you want to be.
Sadly in some situations, this feeling may very well be reality. But, what you can control is your decision to get help. If you are in this position, there is help out there and it’s best to seek that help as soon as you realise there’s a problem. Citizen’s Advice is always a good starting point. The level of non-judgemental practical support really is excellent. Whilst at University, I volunteered with the Student Citizen’s Advice and saw first hand the difference it makes. Asking for help shouldn’t be embarrassing or shameful, I personally view it as a positive step in the right direction.
In other situations, loss of control isn’t the reality and with changes to how you manage your money you can put yourself back in to a position whereby you feel like everything is manageable and stable. This considerations below are primarily aimed at those of you in this position so you can get to where you want to be financially.
1. Create a budget
In last month’s blog, Jo shared her top tips for how to do this.
Why is it important? Well, living within your means and finding ways to save money will not only help you get through a recession but it will also help you to keep planning for tomorrow rather than just living for today.
Lifestyle creep is the phenomenon of spending more as your income increases and psychologically feeling like you ‘need’ more or better things as opposed to it just been a ‘want’. By reviewing what you currently spend, you will be able to identify what you splurge on and differentiate between what’s essential and what’s a ‘nice to have’. For me, I’ve just cut out buying a bunch of flowers every week as though I love to have fresh flowers in the house, I definitely don’t ‘need’ them. That one decision has given me an extra £25-£30 per month to put towards my heating bill.
Financially, we should always be shopping around for better interest rates, but also consider thinks like cashback and rewards. And when it comes to your bills, shop around for better tariffs. Every penny helps!
The second part of creating a budget is setting budgets for specific things. This could be how much you spend on clothes, on the kids activities or on socialising. The point is that you allocate yourself a set level of spending to not go over, which if focused on will stop you making impulsive spending decisions. That way at the end of the month you know you have successfully lived within your means.
In addition to this, it’s important to factor in saving money so you have an emergency fund as well as continuing to make pension contributions. It can be tempting to stop these type of savings instead of reducing what your lifestyle creep costs as it means you can still do all the things that you want without having to give anything up. This could be a foolish mistake to make as it has the potential to derail your longer term plans.
2. Reduce debt
Having any kind of debt usually costs you money unless you have a 0% deal. Paying interest on debt can be expensive and as your disposable income decreases due to cost of living increases it may get harder to repay your debt. If you reduce your payments the debt will take longer to pay off and cost you more over the term you hold it. If you lost your job, it could be that you can’t afford to repay the debt at all. This increases the risk of impacting your credit score for many years to come as well as the risk of bankruptcy.
For these reasons, it’s generally a good idea to reduce your debt and avoid taking on any new debts.
3. Increase savings
Having a financial cushion or ‘emergency fund’ is always a good idea. How much this should be is different for everyone. Most people we speak to like to ensure they have enough saved to be able to pay their bills for 3-6 months if they didn’t have any income. Me, well I like to work with 12 months of bill money set aside.
Consider:
- How long would your savings currently last?
- How long would you like to be able to manage?
If you’re not at your ideal, make sure you plan in saving money when you create your budget.
Similarly, if you have your own business look at what your overheads are and how much you need to have saved to cover these for a set period. The businesses we work with like to know they have enough in the bank to be able to keep the doors open for the next 6 months.
4. Look for opportunities to grow your income
Lastly, recessions can create pockets of opportunity and for that reason it may be right for you to look at how to grow your income. Do you have a side-hustle that you want to get off the ground? Could you sell used clothes instead of taking them to the charity shop? Do you have a skill that you could market? Think creatively and ask family or friends to support you.
Likewise, having a financial health check with a professional could be the next step you need to take to get the support you need. We love it when we see people with big plans and entrepreneurial spirit, as helping you achieve your dreams is such a fun part of the job. That said, achieving a firm financial foundation so you and your family are protected gives us an unbeatable warm fuzzy feeling. So if you need some help don’t be scared to reach out – it’s what we are here for!
For more help and advice, call us on 01482 275540 or, complete our contact form here. We also offer no obligation financial advice in our complimentary guide, covering wealth management, retirement, and inheritance tax planning.
