The five-step plan to recession-proof your finances

As anyone who lived through the UK’s 2008/9 recession will remember, it brought a rise in unemployment, in personal debt and a crunch on earnings. In that recession it took five years for the UK economy to get back to its pre-recession size, showing how long many households need to prepare to tighten their belts for. So, what can you do to prepare your finances to be as recession-proof as possible in case we see an economic downturn?

1. Address your debts

First focus on using any spare cash to pay down expensive debt you have, such as credit cards or loans. Find the debt with the highest interest rate and start paying that off first, before moving to the next highest rate. Moving this burden off your finances could really help if times get tougher.

However, many people won’t be in a position where they have spare cash to be able to funnel into paying off debt. If that’s the case your focus should be on reducing the cost of any debt. Interest rates have risen from their record lows, which means it is important to shop around for the best deals. Those with better credit records will find they have more options open to them, but moving your debt to a credit card or a personal loan on a cheaper interest rate could be a good option, and means you can use more of your capital to pay down the actual debt rather than just paying off the interest.

If your finances have already been affected by the cost-of-living crisis there is lots of help you can get from the bank, such as payment holidays on loans and credit cards. Be careful with payment holidays though, as you’ll still pay the interest so it can cost you more in the long term.

2. Build up an emergency pot

Your next step should be to build up an emergency pot of cash that you can fall back on should you lose your job, see your income cut or face any unexpected costs.

It’s a good idea to build up between three to six months’ outgoings, so tot up your mortgage or rent, bills, and essentials and work out how much you need. If this seems like a high figure then just put away anything that you can. This money should be available immediately, so put it in an easy-access cash account rather than one where access to the money is restricted. But find the one that’s paying the highest rate of interest.

3. Take the red pen to your outgoings

A good way to generate some extra cash each month, and get your finances as lean as possible, is to use any spare time to check you’re paying the cheapest price for all your services.

Start with the big things, such as making sure you’re on a competitive mortgage rate, particularly as the sharp rise in interest rates has pushed up the cost of borrowing for a home loan. If you’re worried about losing your job in the future then you might want to extend the term of your mortgage so your monthly repayments are lower. Clearly this will cost you more in the long run, as you’ll be paying interest on the debt for longer, so you need to weigh up the pros and cons. First steps are to look at how much interest you’re paying at the moment – if you’re on your lender’s standard variable rate (or SVR) then you’ll likely be paying far higher interest than new deals would offer. But you also need to look at the available equity you have in your home, what your home is worth and whether your income is sufficient to be eligible for a new deal. Speaking to a broker could be a good starting point.

Once you’ve tackled that big outgoing, look at unwanted direct debits or bills that have crept up in price. Whether it’s assessing whether you really need five different streaming services, realising that your Sky package has shot up in price or slashing the cost of your mobile phone bill, there’s lots you can do just by going on a comparison website and hunting for a new deal.

4. Cut lifestyle creep

Aside from the bills you pay each month, now is a good time to look at what you spend each month on ‘non-essentials’. Look back at the previous few months’ bank statements and work out where you’re spending your money.

As people earn more, they gradually spend more on their everyday lives, whether that’s buying slightly nicer clothes, going to better restaurants or on pricier holidays. It’s so small that we often don’t notice it, hence the term ‘lifestyle creep’. There’s nothing wrong with this as long as you’re living within your means, but it’s a good idea to pinpoint areas where you can easily cut back and save money, should you need to.

5. Work on a side-hustle

If you have any spare time it could be a good chance to turn your hobby into something that could generate an extra income or to learn a new skill that could turn into a new line of work or a second income. If you’re worried about job security it could be good to have an alternative source of income to fall back on, even if it’s only small to start with. Failing that, you could use it as a chance to de-clutter your house and earmark stuff that you’re not using anymore that could be sold to generate money. Websites like Gumtree, eBay, Vinted and Facebook Marketplace are great for selling your second-hand stuff, and lots of people are hunting for things to buy for a cheaper price, considering the rising cost of living.


Episode 10: What are the risks of investing?

Not all investments are made equal: some are riskier – and potentially more rewarding – than others. In this episode, our experts order investment types from safest to riskiest.

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Written by:
Laura Suter

Laura Suter is head of personal finance at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.


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