Last month, the United Kingdom was officially declared to be in a recession. This happens when the economy shrinks for two quarters in a row. A shrinking economy essentially means that supply and demand have fallen out of balance: people are not buying as many goods and services and there aren’t enough jobs to go around.
Technically, that recession is already over – but long-term economic prospects are not looking good for the country as businesses struggle to maintain a profit in the new post-Covid world. This means that it’s wise to run through your finances and consider how you can prepare for the potential struggles of the year ahead.
Prioritise saving
One of the biggest concerns of a recession is reduced job security. Building up an emergency fund that covers three (or ideally even six) months of bills and living expenses should be your highest priority. Continue to make payments on any debts that you have but try to cut out any non-essential spending and channel the money into an easy access savings account. Start small if you have to: even saving £30 means there will be one less bill or food shop to worry about.
While we all like to make money on our savings, now isn’t the time to worry too much about interest rates. Your money needs to be somewhere that you can reach it easily, even if that means earning less. If you have money locked away in an account with a long notice period then you might want to consider withdrawing some now so that you have it on hand should you need it.
Shift your debts to pay less interest
Paying down your debts as much as possible is a great plan, but if you don’t have much spare cash then the next best option is to reduce the cost of those debts. Shifting debt from a high interest overdraft or credit card onto a 0 per cent card or a cheaper personal loan can bring down the interest significantly. This will save you money and help you to pay off your debt more quickly.
Look for a credit card that is offering 0 per cent interest on balance transfers. You will probably have to pay a small one-off fee, but this will almost always beat the interest that you’re currently paying. Do be aware that opening a new credit card will leave a mark on your credit report.
Create a back-up budget
Your current budget probably includes at least a few treats or non-essential expenses – perhaps you have a Netflix subscription, or plan to go out to eat once or twice each month. This is a good thing as long as you can afford it: being overly frugal can cause stress and stop you from feeling satisfied in life.
A back-up budget looks at what your life would cost without any of these little luxuries. By covering the bare minimum that you need to get by – rent or mortgage, essential bills and basic food costs – you can work out a liveable minimum monthly income. You might be surprised, and reassured, by how low this monthly cost is. Creating the emergency budget now, even if you hope you won’t have to use it, gives you one less thing to worry about should your financial situation change.