How to prepare for a recessionAug 20, 2020
Are we in a recession?
Recession is a word no one particularly wants to hear, much more live through.
You are probably reading this article because you want to understand if we are in a recession and how to survive one. So let's break it down for you.
You may as of now know that the impact of coronavirus has been felt all over the world, and many countries with moderately strong economies have suddenly slipped into recession as companies cut jobs, businesses shatter, and people forced to stay at home due to lockdown restrictions.
UK recession after GDP falls 20.4%
On August 12th it was officially announced that the UK entered into a recession after GDP fell 20.4% between May and June. GDP numbers go up and down all the time.
So what’s different about this one? Well, this has been the second consecutive fall in two quarters. A recession is measured by two consecutive quarters of negative economic growth.
This means many households would be in a position to save more money while furloughed.
On the other side, many people have already lost jobs, and may not return to their source of income.
Businesses trying their best to protect staff salary
Although lockdown has eased significantly since July, many sectors have not been able to fully recover from the lockdown.
According to the Office Of National Statistics, 2/5 businesses who furloughed their staff were able to provide a top-up to keep their full salaries.
Impact of COVID on households, unemployment and property
With 60,000 people in the UK already claiming unemployment benefits, these numbers are due to go up in November when the Government support for Job retention scheme seizes.
With higher unemployment rates, long term economic downturn and the housing market expected to crash even further we can agree that we are in a recession for sure.
How to survive a recession
As we grapple with one of the worst downturns in recent times, many are wondering, how long will it last?
If you are worried about your finances, here are some tips on how to survive a recession.
1. Do a Financial Audit And Trim Down Your Living
First of all, you will need to be completely honest with yourself about your financial status. Conduct a thorough audit of your finances to gain a comprehensive understanding of your income and expenses.
This will help you determine holes in your finances and curb spending.
Once you’ve found the potholes in your finances, you should work on building good money habits to cut out unnecessary expenditures.
2. Set Up An Emergency Fund
Start an emergency fund now if you have any money to spare. Having an emergency fund will be essential for surviving a recession.
This should be prepared as early as possible, especially if you are still working from home.
This emergency fund can be kept in a separate bank account that you can instantly access.
However, this money will remain untouched unless in emergency situations, like needing to pay the mortgage, buy food and to get to work and job interviews. It’s money for the things you need, not for the things you want.
You’ll have to be strict by cutting down on things like online shopping and intentionally start stashing away money in a savings account.
Moreover, knowing that you have money set aside if the worst happens would definitely ease some of your financial worries.
3. Furloughed? Start Planning For The Future
Everyone, whether in a recession or not should plan for the future. There’s a chance your company can experience financial difficulties, and you might lose your job.
Even though the government is putting in place schemes to protect jobs, it is important that you provide financial backing for yourself, if it happens that your company cannot bring you back.
4. A budget is imperative
If you’ve just recently been made redundant, now may be a great time to start being consistent with budgeting.
Be very clear on what your essential bills are and cut off any non-essential bills.
Call the companies that fall under essential bills to ensure you are getting the best deal.
Compare deals using comparison sites and consider switching to a cheaper company where possible.
Having worked through your budget, you can then know how much each month costs and how far any redundancy money will carry you for.
5. Cut impulse purchases
Take more time (at least 24 hours) to think about purchases before buying it. Think about what you are buying and determine if you really need it or it is just a want.
Now is not the time to make big-ticket purchases.
After you have built up your emergency fund you can then start to save for big purchases and then buy them.
If you have to buy essential big-ticket purchases, consider buying at the best rate possible.
This could mean shopping around, asking for a discount and may be waiting for a sale.
6. Sort out your debts
One of the things you don’t want to do with regards to debts is to try using your spare savings to clear them.
If you’ve got multiple debts like credit cards, personal loan, overdraft, make repaying high-interest debt a priority, as it is the one that grows and eats your money up the fastest.
Paying off debts early means you are able to keep more money for yourself.
Making sure that you are paying the minimum and more will protect your credit score.
Next, consider how your future debt can be reduced. Interest rates have fallen, which means the cost of debt has also slightly reduced.
So if you have a good credit score, consolidating or moving the debt to a 0% credit card, or personal loan with a cheaper interest rate might be an option that is available to you.
It's a wrap
In summary, starting a healthy emergency fund, adopting a more frugal lifestyle, and cutting down on expenditure are just some of many ways that can help you survive a recession.
While we can’t control a recession, we can prepare for the tough financial times.
Safeguarding your wealth with these tips will make a world of difference in the future.
When you recession-proof your finances, an economic downturn is no longer top of your worries. Instead, you can live comfortably, knowing that while the world is out of control, your finances are in control and you are ready for whatever is coming.