Posted on: 18th August 2020 in Financial Planning
A lot has happened since the UK last went into recession.
The country voted to leave the EU, Donald Trump became the 45th US president, and three World Cups have passed.
When the UK fell into recession for the first time in 11 years last week, it seemed in keeping with a gloomy 2020. But what does the current economic situation mean, and how can you protect your finances?
Before we look at how you can recession-proof your finances, let’s take a look at what a recession is and how we got here.
Gross Domestic Product (GDP) is used to measure a country’s economy. GDP is essentially the value of goods and services produced by the country.
When things are going well, the country’s economy grows and the GDP increases. The value of goods and services can fall for several reasons. When they do, the GDP will decrease. If a country’s GDP falls for two consecutive quarters, a recession occurs.
A recession shouldn’t be confused with a depression. Generally speaking, if a recession is severe and carries on for an extended period, it is classed as a depression.
A lot of experts agree that a recession is a normal part of the business cycle. That’s not to say that a recession isn’t unpleasant; it’s still a word that worries people.
However, the UK entering a recession shouldn’t come as a huge surprise.
The ongoing Brexit saga reached its climax in January when the UK officially set in motion their exit from the EU. Roughly six weeks later, the country went into lockdown, and the economy ground to a halt.
As the country continues its fight against Covid-19, government borrowing and spending has increased. All of the above have contributed to the recession.
Official GDP figures released by the Office for National Statistics (ONS) on 12 August confirmed the recession.
In the first quarter of 2020 (January – March), the UK GDP fell by 2.2%. The second quarter (April – June) saw the UK GDP fall by 20.4% – the steepest fall ever recorded.
The mention of recession can cause panic, but it might not be as bad as first feared.
Early estimates by the Bank of England (BoE) predicted that the economy would shrink by 14%. However, the BoE now expects a 9.5% drop to the UK economy.
Some of the side effects of a recession include job losses as well as companies making cutbacks. This can make pay rises and promotions harder to come by.
With that in mind, now is a good time to start looking at ways to make your finances recession-proof.
A recession doesn’t have to sidetrack your financial goals, or worse still, derail them entirely.
Here are some tips to recession-proof your finances.
You want to make sure your money is safe, especially during times of economic uncertainty. A good place to start is by checking if your money is protected by the Financial Services Compensation Scheme (FSCS).
The FSCS is a service set up by parliament and funded by the financial services industry. The FSCS protects your money, should the bank collapse.
The scheme covers all UK-regulated banks and building societies and protects savings up to a value of £85,000. Savings with the National Savings & Investments (NS&I) have no upper limit.
NS&I is backed by HM Treasury, meaning that all of the money you invest is 100% secure.
Creating a budget is the bread and butter when it comes to managing your finances in any climate. Think of a budget as a thorough audit of your finances.
A budget can be as simple as listing all of your incomings and outgoings, or you can take your budgeting a step further. Bullet journals are a great way to track spending, work towards financial goals or even add a little creativity to the way you budget.
By creating a budget, you will get a better picture of your finances. A budget can help you to cut out non-essential spending and free up some extra funds.
If you have previously created a budget, now might be the time to revisit it and make some changes.
2020 has served as an example that anything can happen and how important it is to be prepared.
During a recession, money can be tight. That doesn’t mean the car won’t break down or you won’t need some work doing on the house.
A rainy day fund, otherwise known as an emergency fund, is for just that. It is money you have put aside for emergencies only. As a guide, experts recommend having enough in your emergency fund to last between three and six months.
One of the side effects of a recession can be that credit is harder to come by. Whether you are looking for a loan or a mortgage, a poor credit score can make borrowing more challenging.
Your credit score is what lenders use to determine if you are a responsible borrower. Your credit report is what is used to generate your overall credit score.
If you haven’t already, the best place to start is by accessing your credit report, which you can obtain free of charge.
You can find more information on checking your credit report by visiting the Money Advice Service. You can improve your credit score by making some simple tweaks, such as registering on the electoral roll.
For those who invest their money, having a diverse investment portfolio is something to consider.
Portfolio diversification helps to balance the risk/reward of investments. By spreading your investments across asset classes, you can offset potential losses.
It’s not a good idea to put all of your eggs in one basket, especially during a recession. If you would like to know more about investment strategies and how to implement them into your portfolio, it’s best to speak with a professional.
A recession is never a good thing, but by changing your strategy and adapting, you can continue to work towards your financial goals.
If you are looking to recession-proof your finances, our tips are a great way to get started. However, speaking with a professional can be beneficial, especially when it comes to finding the best financial products to suit your needs.
If you would like more information on managing your finances, contact our experts. Our team of independent financial advisers have a wealth of experience, working with clients to maximise their finances in any climate.
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