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How do I prepare financially for a recession?

Updated 02 August 2022

4min read

Kate Morgan
Staff Writer

With costs rising due to inflation and fears mounting of a recession (simply defined as a period of economic decline), the UK could be heading for a period of ‘stagflation’ — when inflation is high but economic growth is slow.   

How do I prepare financially for a recession?

It was hoped that the inflation we’re experiencing would be temporary, but it now looks to be here for the longer term, with the Bank of England and the Organisation for Economic Cooperation and Development (OECD) predicting that high inflation will still be here in 2023. 

Added to that, this year the UK has already experienced two consecutive falls in Gross Domestic Product (GDP) — i.e., the overall monetary value of the country’s goods and services.

In March 2022 the UK economy contracted by 0.1 per cent, and then it shrank a further 0.3 per cent in April.

Although some forecasters remain positive that the economy can still recover, the likelihood of recession is rising fast.  

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 fear.

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 having a very real sense of worry that any recession — mild or severe — will have a major impact on people’s finances.  

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

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

With household bills on the rise and the risk of recession making the risk of redundancy higher, it’s sensible — if you’re able — to save enough money to cover 3–6 months’ worth of expenses.  

This will give you the peace of mind that you can withstand any financial bad weather 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.  

  1. Reduce debt  

Pay off whatever debts you can, starting with the most expensive — 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 credit card balance transfer, for example, can allow you to move to a lower interest rate.  

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. 

  1. Invest wisely 

Oddly, recessions aren’t necessarily all bad news — opportunities can open too, 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 medication or toilet roll — 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 that 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.  

  1. Fix your mortgage 

Now is the ideal time to talk to a mortgage broker to find out whether you’d be better on a fixed rate to protect you against interest rate rises.  

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

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?  

  1. 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.  

  1. 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 that their pension fund has decreased in value due to the 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 opportunity for higher returns in the longer term. Simply finding out more about pensions isn’t a bad place to start. 

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.