How to Recession-Proof Your Finances

During the lockdown months of 2020 many commentators speculated that the UK was heading into a major period of recession - despite the UK government’s attempts to support the economy with its Job Retention Scheme and other measures. At the time of writing in August, it turns out that these predictions were largely true and, if anything, worse than expected. Not only is the UK in recession for the first time in 11 years, the damage is the worst out of any major economy with a GDP shrinkage of 20.4% in the second quarter.

A recession is usually defined as two consecutive quarters of economic decline. Yet what does this mean for your wealth and finances? Indeed, many people may be vaguely aware that a recession is “bad” but have not felt any direct impact on their finances yet. This article outlines some of the implications of a recession for your money, and offers some ideas about how to increase your financial security in the months ahead.

What does a recession mean for you?

For many workers a recession could mean a reduction in hours, pay or lost employment. Quite often in these circumstances, businesses struggle to raise the revenues they were generating in “normal times” - leading to a loss in profit margins. Not only does this mean fewer/no dividend payments to investors (lowering confidence), but it means less money to cover office expenses such as rent, supplier costs and - crucially - wages. In the worst case scenarios, such pressures can lead to a business becoming forced to shed staff or even shut down entirely.

Many businesses and workers have been shielded from these outcomes in the months between March and August 2020 due to the UK government’s support measures. Businesses have had access to loans to help keep afloat, and since July many sectors - particularly those involved in entertainments and leisure - have enjoyed a VAT cut.

Yet despite many of these schemes, many customers in the UK are reluctant to return to their “pre-COVID” spending habits and, in addition to other factors, the economy is struggling. Unemployment, which until 2020 was at very low levels in the UK, has now increased by 220,000 in the second quarter - the largest increase since the 2008-9 Financial Crisis. The Bank of England, moreover, is anticipating that the rate of UK unemployment will increase twofold by the end of the year, possibly encompassing 2.5m people.

What can I do to protect my finances?

Sadly, if you are working for an employer which is near financial collapse due to the recession then there might be very little you can do to stop that from happening. The furlough scheme, moreover, ends in October 2020 and it appears unlikely that this will be extended. This has kept many people in jobs which they might otherwise have completely lost, covering 80% of their wages (up to £2,500 per month). At the time of writing, this is still two months away which gives you time to boost your emergency fund - particularly if you are working in a job that is at higher risk of getting axed. Normally, financial advisers recommend building an easy-access savings fund which can cover 3-6 months of living costs which is set aside specifically for emergencies such as redundancy or a large, unexpected cost (e.g. a broken boiler which needs replacing).

It may not be a bad idea to prepare your living situation for the worst. Those who are single and who are also a tenant, for instance, may do well to arrange a fall-back option in case you lose work in the recession and cannot continue your rent payments. Moving back in with your parents for a while, for instance, may be a necessity for some people in late 2020 or 2021. For those who do not have this fall-back option, do you have a sibling or good friend who you could arrange a reciprocal arrangement like this, in case either or you lose work?

Of course, these are some of the worst-case scenarios from the recession. Whilst it is wise to prepare for the worst, there are still good reasons to be positive about the outlook ahead. There are also other measures which can help to “recession-proof” your finances and provide support before these kinds of options need to be considered. Here are some ideas:

1. Life insurance. This will be particularly important for couples, parents and those with dependents. If you were to suddenly die, what kind of financial position would it leave your loved ones in? A life insurance policy, whilst an added monthly expense, could be a sensible way to increase their financial security should the worst happen - especially if you are the breadwinner in your family. This could release the funds needed to pay off the mortgage on your house, for instance, thus opening up significant financial “breathing space” for your spouse/dependents in a recession.
   Income protection. Whilst it will not replace your lost income if you are made redundant, an income protection policy could be a vital lifeline in a recession if you suddenly could no longer work due to serious illness or injury.
2. Pay down debt. The monthly debt repayments on a credit card or personal loan can be financially suffocating in the best of times. During a recession, however, they could put you in serious financial difficulty - even if interest rates are currently at an historical low. Now could be the most sensible time to clear these debts, particularly before October 2020 when the Job Retention Scheme is scheduled to end. From this point, it could become much more difficult for many people to pay off their debts if they lose their jobs.
3. Cut expenses. Do you have a car finance agreement which is coming up to a close in the coming months? Consider not renewing it and buying a car outright instead - that is, if you even need one. This could shed hundreds of pounds in monthly expenses which could be otherwise put towards short-term savings. Do you have a Netflix, NowTV or other monthly digital subscription which you are hardly using? Consider scrapping it. In short, take the opportunity now to conduct a thorough review of your budget.
4. Review your investments. Do you have a Buy To Let property which was hardly turning a profit in 2019? Take into consideration that things could be squeezed even further in 2020 and beyond as we navigate this recession. Do you have an investment portfolio which is composed heavily of higher-risk equities? Consider reviewing this with your financial adviser to ensure that your portfolio still reflects your risk attitude, your financial goals and is appropriately diversified.
5. Put large savings to good use. Are you in the more fortunate position of having a large sum of money stashed away? Perhaps you recently came across a significant lump sum from an inheritance, or you sold a high-value item (e.g. an antique car). If so, consider seeking financial advice about what to do with it. This could make a world of difference to your financial security in a recession. For instance, perhaps you could use it to buy a property outright. In this case, you’d likely need far less money coming in each month to cover your expenses, since you’d have no mortgage to pay off.