With economy shrinking by 0.3% in August, it’s most likely that Britain will fall into recession this year. Current price rises are outpacing current growth of pay and while you can’t stop a recession, there are important steps to take in order to protect yourself financially as much as you can.
What is a recession?
Recession is defined by an economy shrinking over two consecutive quarters. As a result of the economy contracting, customers are spending less in order to save money. This has a knock-on effect on businesses, which reduces their output and therefore laying off staff due to decreased profits.
What caused the UK To go into a recession?
Due to recent effects of the pandemic and energy crisis caused by the Ukrainian conflict, the costs of gas and electricity increased dramatically, forcing people to spend more money and leaving them with less disposable income. This causes a knock-on effect of higher food, fuel bills and borrowing costs.
This situation is expected to get worse. Therefore people limit their spending to necessary essential items.
As a result, less money is flowing into businesses, causing a loss of jobs and employment opportunities as a whole.
How could recession affect you?
The issues associated with recession will trickle down to everyday lives and the effects can be felt for years to come. It will be more difficult to get a pay rise or promotion or you could lose your job due to businesses having to save money. The difficulty of getting a new job could also increase.
Many freelancers and businesses would have to lay off staff due to decreased profits and could be made bankrupt. Many shops and businesses you know could close permanently.
Recession is also often widening a gap between the rich and poor, affecting the latter greatly. Therefore people with diversified income will be often better off in terms of financial security.
Below, we’ll explore how you can recession-proof your finances.
1. Live within your means
Recession increases the risk of redundancies. Therefore having debt payments is risky. Could you really afford to pay off your debt without your current employment?
Don’t take on any new debt if you can avoid it and try not to spend more than you can afford each month.
2. Reduce your expenses
The Increasing cost of living will also mean that you’ll have to have a hard look at your personal finances.
Even small expenses such as morning coffee or a tesco meal deal can add up to a hefty bill at the end of the month. Write your income down and divide it into categories. Then decide where you could reduce your spending. It might be one takeaway less each month, but it’ll add up quickly into a hefty sum that might save you if you’ll become redundant further down the line.
3. Expand your savings
If you can, make sure to have three to six months of your monthly salary in savings that you cannot access directly. Put these funds in your savings account and keep them just in case your business or employment will fall through. This would buy you time in an emergency and could glide you over until your next opportunity arises.
4. Start a side-hustle
Diversifying your income is one of the best ways to stay recession proof. it’s important to not take your job for granted. An extra job or service you can provide could create a viable second stream of income if your employer decides that it’s time for redundancies due to tough market conditions.
5. Invest if you can
If you’ve still got some disposable income, investing is a good option to diversify your assets and stop devaluing your savings
You could take an advantage of falling stock market and buy shares at reduced price. That could turn into a hefty profit once we are out of recession and the value of the businesses will rise again.
It’s important though, to do thorough research on businesses you’re investing to. Make sure they’re stable, secure, and have a potential to bounce back once the recessions ends.
Never put all of your eggs into one basket though. It’s important to diversify your investments just in case some of the companies fall. That way you can always end up with your savings intact, or even profit if you’re particularly lucky with your other investments.
6. Delay your big financial decisions
It’s probably not the best time to decide on big financial decisions or spending during a recession. You might regret your decision further down the line once you’ll lose your employment. Therefore, it’s better to wait it out and focus on putting yourself in a good financial position instead to give you a space to manoeuvre when times get tough.