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How do I prepare financially for a recession?

The UK has fallen into a recession in the second half of 2023 after gross domestic product (GDP) declined by 0.3% between October and December, and 0.1% between July and September. 

UK inflation was unchanged in January at 4%, making it less likely that the base rate will be cut by the Bank of England (BoE) from mid-2024, which can positively impact mortgage rates that are historically high. 

This isn’t the first time the UK has been in recession, and it certainly won’t be the last.

Recessions are a natural part of the economic cycle, and although difficult, they often aren’t as bad as many originally feared.

The UK’s last recession was a result of the COVID-19 pandemic, and although many forecasters correctly predicted its severity, few foresaw how quickly our economy would recover.

Nevertheless, this doesn’t mean people aren’t justified in being worried that any recession, whether it's mild or severe, will have a major impact on their finances.  

Here, we share our top six tips to help you prepare your finances for a recession.

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1. Save up an emergency fund (if you can) 

With high household bills and a recession making the risk of redundancy more likely, it’s sensible, if you’re able, to save enough money to cover three to six months’ worth of expenses.  

This will give you the peace of mind that you can withstand any financial shocks without having to take on additional debts or fall behind with bills.

This emergency fund can also help you pay for the unexpected, such as a leaking roof or damaged car, without having to incur any debt.  

If you’re not in a position to save, however, there are a number of ways you can make savings within your everyday expenses.

Check out this article on mindful spending to find out more.  

2. Reduce debt  

Pay off whatever debts you can, starting with the most expensive, which are usually credit cards.

And if you have multiple debts, focus on reducing the ones with the highest interest rate first.  

If you’re not able to pay down your debts, see if you can reduce the amount of interest you’re paying. A balance transfer credit card, for example, may offer a 0% interest period so you can clear your debt.

For those with multiple debts, consider consolidating them all into one place.

Even if there’s little improvement in the interest rate, having all your debts in one pot can make them considerably easier to manage. 

3. Invest wisely 

Oddly, recessions aren’t necessarily all bad news.

There are opportunities for anyone willing to invest in companies with a history of being resilient in the face of an economic downturn.

Previous recessions have taught us that spending on essential goods, such as prescription medications, rarely drops during a recession, so the companies that provide these items can prove a wise investment option.  

If you are considering investing more generally, make sure to invest for the longer term.

Remember too , too, as interest rates rise, your cash will be worth less.

So, if you do have significant savings in cash, now might be the time to consider alternative investment options.

A good financial adviser will give you sound investment advice.  

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4. Fix your mortgage 

If your mortgage is expiring soon, now is the ideal time to talk to a mortgage broker.

For those not wanting to or are unable to move to a fixed rate, it’s a good idea to prepare for mortgage rate rises by making sure you can afford higher monthly payments.

If things are a little tight, re-evaluate your monthly expenses to see if you can make any savings that would cover a potential rate rise.

Are there any monthly subscriptions you could cancel, for example?  

5. Check your insurance  

Your greatest asset is your income, so it’s important to make sure it is protected if you become unable to work due to illness or injury.

Income protection or critical illness cover can prove a financial lifeline for you and your family if you become too ill to work.  

If you’re still paying into a mortgage, you may want to consider mortgage life insurance.

This product will pay out a lump sum to your family if you die prematurely, ensuring they aren’t burdened with the remainder of your mortgage debt.

The likelihood of this happening is small, but preparing for every eventuality can be invaluable for peace of mind.  

6. Prioritise your pension 

When finances are tight, too often people prioritise other expenses over their pension, but your pension is a great and tax-efficient way to save.

It’s hugely important to protect that asset, even when the temptation may be to cut back on your contributions.  

People approaching retirement may be concerned if their pension fund has decreased in value due to a falling stock market.

For most people, this shouldn’t be an issue since the risk level of a pension portfolio decreases as you get closer to retirement age.

However, if you’re at all unsure, speak to your pension provider to make sure this isn’t the case.  

It may seem like a strange time to do it, but if you don’t already have a pension, now could be the ideal moment to start.

Investing while the stock market is low will give you more opportunities for higher returns in the longer term.

Simply finding out more about pensions isn’t a bad place to start. 

How can a financial adviser help me?

You can prepare for a recession with good financial planning and expert advice.

Let us put you in touch with the right financial adviser who can help make your finances recession-proof. 

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About the author
Kate has written for leading publications and blue chip companies over the last 20 years.