Recession is coming. The Bank of England boss said it, the Chancellor's said it, and we’re about to feel it. This is a crash course in recession-proofing your finances, and while there are no guarantees, it should at least better prepare you to roll with the punches.
The technical definition is quite simple; the economy has to shrink for two successive quarters (ie over six months). Yet this glib phrasing misses the reality. The real impact is a widespread change in the way things work.
And worse it's a spiral, recession can feed itself. As people cut back, businesses make less, so they pay less or lay off staff. The exact impact is always difficult to predict, but the biggest personal factors are likely to be...
Job Losses.
Companies feel the pinch not just of lower profits, but cash flow, as customers may delay their payments. All this can hurt, and one response is often to cut jobs, leading to widespread increases in redundancies.
During this recession unemployment is predicted to rise to 2.5 – 3.0 million, yet on the bright side that means most people working today will still be in work in the middle of it.
However, there's still the lottery effect; you may be one of the unlucky ones who loses their job. The risk of that means you should prepare for the worst-case scenario.
Pay freezes/cuts.
An alternative to job losses is freezing or cutting pay, or at the very least banning overtime for those who earn it. Either way, this means disposable income will take a hit.
Companies going bankrupt.
There is also a lack of stability, as some businesses big and small will inevitably go bust. This creates a sense of insecurity as people question whether they’ll take delivery of things they buy.
Lack of mobility.
With a squeeze on jobs, and lower house prices, individuals lack mobility to change career and/or move location. Thus, security starts to feel more important than risk.
The only silver lining is interest rates are likely to drop, making mortgages and borrowing cheaper (though the credit crunch will eat some of that gain away), though that’s still a hit for savers. Price cuts and decreased inflation are likely too due to diminished demand.
Think with a 'recession head' on
The last recession gripped in 1991, which means anyone under 35 probably wasn’t working when it happened. Over the years of boom, there’s been a mentality of stability and growth, and a feeling that prices, earnings, investments and more always go up. So now it's time to get your recession head on, and start to think more defensively.
Self-employed? Dock your own pay
If you’re self employed, always think for every £100 you earn, only roughly £65 is yours, £35 belongs to the taxman. So as soon as you get it stash it somewhere, so it’s not in your normal account and you won’t be faced with the nightmare of having to find it. And higher rate taxpayers you need to dock even more.
If you end up putting too much away, then when you pay your tax bill, see the spare cash as a bonus. The simple way to do this is simply set up a savings account where you sweep the money automatically each time you get paid; that way you earn interest on it.
However those who really need discipline can buy a tax certificate from the government in advance which can then only be used to pay for tax. You will earn interest on money paid in early, though generally less than a top savings account. Yet this is an effective way to prevent yourself from accessing the cash so you’re always sure you’ll have enough.
If your industry will likely be hard-hit, and redundancy looms, avoid what I call ‘income eaters’. This is where you sign up to payments which take a whacking chunk out of your monthly earnings and lock you into a set period.
These include gym memberships; digital TV subscriptions; mobile phone cashback; any hire purchase e.g. TV; new car loan; and school fees. If you must sign up, be sure to bag deals with shorter lock-ins.
To be truly prepared, if losing your job’s likely, start living now as if you’d already lost it. Cut back on everything, and put spare cash away for to help you live then. This way while you’re living tighter for longer, the depths aren’t as deep.
Benefits and tax-credit nets spread further than you think, so make sure you're getting all you're entitled to. For families, it’s possible you qualify for benefits if your household income is under £66,350. It only takes five minutes to check, so what are you waiting for?
The more solid and debt-free your finances are when recession starts, the more chance you have of surviving it unscathed. It’s likely to be a strain on all pockets, so lowering your commitments will help.
Pay off debts
Debt isn’t something you can cancel, so being lumbered with it mid-recession is a nightmare. The absolute priority is to use any savings or spare cash to clear it. Many people fight against this, but the logic is irrefutable...
Owe a credit card £1,000 at a typical 18% rate and it’s costing you £180 a year. Yet £1,000 in even the top savings account after tax pays only 4%, that’s £40 a year. Therefore pay off the card with the savings and you’re £140 a year better off.
Even so, many people prioritise an ‘emergency fund’ over clearing debts. Again, for most this is a false logic, since clearing debts saves you money, and even if an emergency happened, you could simply use your credit cards to borrow the cash back making you no worse off overall. See the full guide linked below for a detailed explanation of the pros, cons and options.
If you’ve cleared your credit cards & overdraft, and can’t overpay on any loans, then it is time to build a cash emergency fund. This should be able to support you for around six months, though anything is better than nothing. This emergency provision is a great buffer.
If you never need it, then its also a great way to build up your savings and ensure you earn decent interest.
As the biggest monthly outlay, anything you do now to reduce the mortgage hit will pay big during bad times. With steep mortgage rates, sticking money into your home loan is actually a bit like saving at the mortgage rate, but tax-free; for most, that’s unbeatable and totally safe. Better still, reducing your loan size boosts your chances of cheaper deals when you remortgage.
Yet I’ve deliberately put this after building a cash emergency fund, as for all but those on flexible mortgages with a borrow back facility, it's important to have some cash in the bank. Let me give you a worrying recession-based scenario that should be avoided.
Barry Boom is sitting pretty, he’s got a decent job, £20,000 of savings and comfortably pays off his mortgage every month. Do the maths and he’s better off using the savings to clear the capital on his mortgage.
Sadly, three months later, he’s shocked when his company goes bust and he’s redundant. As he works in the hard-hit housing industry, his job prospects are poor in the short term. Yet he still has to pay the mortgage. However now he’s got no savings and very quickly gets into arrears.
If instead he’d left himself £10,000, he could’ve covered the mortgage and other expenses for well over half a year, safeguarding his home. Admittedly there’s a cost to this, but in recession many will gain from a safety first mentality.
Even at the height of the credit crunch, it's still possible to grab cheap rates now to cut the cost of existing borrowings. As redundancy means your credit score will plummet, it's crucial to sort this out before it's too late.
The key weapon here is credit card balance transfer deals, where you shift debt to a new card(s) cheaply. If you can’t bag new credit now, call existing lenders and ask if they’ll accept debt from your other, more expensive cards; remember, move it where it’s cheapest.
Trimming personal loan costs is tricky as rates are rising, and plenty penalise you, but see if you can remortgage to a cheaper lender without a penalty.
There are a number of financial self-defence techniques you can use to protect against some of the outcomes of recession.
Protect mortgage/loan payments
I’ve often ranted about Payment Protection Insurance (PPI), yet it's not the product but the mis-selling I hate. It's a simple idea: fall ill, suffer an accident or be sick and off work, and specific policies will pay your loan, credit card or mortgage payments for 12 months.
The usual problem is, when bought from lenders alongside the debt, it’s disgustingly, vilely and outrageously expensive; similar products from standalone providers like Paymentcare or British Insurance cost around a tenth of the price!
Thus, if you want the surety PPI provides, getting a standalone policy's a much better proposition. Always check terms are suitable though, and if you’ve ‘foreseeability’ of redundancy, i.e. you genuinely know lay-offs are coming your way, be aware the cover may be invalid.
There are other types of insurance products too, such as income protection insurance, which you may want to consider, though they’re beyond the scope of this website. The difficulty in such products is ensuring the cover will protect you when necessary and balancing up the payout scenario and level with the cost.
Buy goods costing over £100 on a credit card and if the retailer/supplier goes bust before delivery of your goods, the credit card issuer is jointly liable with the company itself, so you can get your money back from it.
Thus, do all bigger spending on the card, just always pay off the debt in full at the end of the month to ensure you’re not charged interest.
Once unthinkable, we’ve seen banks including Northern Rock, Bradford & Bingley, Icesave, Halifax and more in trouble. If you’re relying on your savings ensure they’re safe. The golden rule is no more than £50,000 per person per institution saved.
It’s the constant message of this site, but now it's even more important to save on everything. Ensure you’re not paying a penny more than you should for any goods or services.
Take a day off, and go through everything you spend money on to see if you can get the same for less; including checking if you can reclaim loan insurance or credit card charges, this way, you’ll save £1000s, giving you more money to buffer if the recession hits badly.
