How To Prepare Financially For A Recession

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How to prepare for a recession

If the UK entered a recession tomorrow, would you be prepared? Signs suggest we’re on the verge of an economic downturn that could be worse than that experienced in 2008.

Although nothing is certain, it’s better to be ready. Fortunately, there are a few steps you can take today - meaning you’ll be in a stronger financial position if the worst happens.

To help you, we’ve put together a guide to help you understand what a recession is, the signs to look for, and strategies you can use to prepare.

What is a recession?

Normally, a country’s economy grows. Such a favourable climate increases the value of goods and services and makes most people slightly richer. During a recession, this effect is reversed. A sustainable economic decline occurs that carries on for at least six months.

Such circumstances are concerning. A prolonged economic crisis will affect the job market, make companies less profitable, and reduce the amount of taxes paid by workers to the government.

That’s why it’s important to recognise the signs and know how to prepare for a recession.

What happens in a recession?

There are a number of indicators to look out for and as follows:
1. Unemployment levels will rise
Decreasing profits will force businesses to make cutbacks by reducing their workforce. This will help them to minimise losses caused by increasing costs versus decreasing revenue.

This rise in unemployment is sudden, affects most industries, and is sustained. The newly unemployed will struggle to secure new roles and be out of work for some time.

2. People will spend less & save more
What happens in a recession? Those lucky enough to have jobs normally save their money to create a financial buffer in case they become unemployed.

Unfortunately, this means less money is inserted back into the economy. In turn, this creates a negative spiral - lengthening the period of a recession instead of shortening it.

3. Borrowing levels might also increase
During a recession, it’s not uncommon for people to take out loans to create extra financial security. Should you need to borrow money under these circumstances, avoid loans with high-interest rates and exit penalties. Otherwise, you could struggle to meet the repayments.

If you work for the NHS, it’s hard to borrow without paying a higher interest rate. At Salad Money, we specialise in helping NHS workers by offering salary-deducted loans or direct debit repaid loans depending on your Trusts relationship with us. Our service is delivered via an Open Banking service that’s FCA regulated for your peace of mind and security.

4. House prices are likely to decrease
Homeowners may struggle to meet mortgage repayments during a recession, leading to their properties being eventually repossessed. This means there’ll be more homes for sale but demand will be lower - forcing down the overall cost of house prices.

5. There’ll be less investment & borrowing
Companies will adopt a risk-averse attitude by investing less (or not at all). Businesses and individuals could also find it harder to borrow. That’s because banks might not have the resources needed to meet their customers’ obligations.

When will the next recession be?

Whilst it’s impossible to predict an exact date, recessions normally recur every 10-15 years, and we’re now within that time range.

Here are three reasons to support the argument a recession is looming:

According to the Office of National Statistics, workers in the UK are being paid less, and employment has fallen due to redundancies caused by COVID.

Global debt has increased by $246trn and household debt has grown in line with this figure in countries like Australia, Canada, and New Zealand.

COVID-19 has arguably accelerated the likelihood of a recession, as illustrated by the recent collapse of Philip Green’s Arcadia group which is now in administration.

How to prepare your finances

With a recession almost inevitable, now’s the right time to get your financial affairs in order so you’re prepared for the challenging economic circumstances ahead.

Four things you can do to get ready

1. Reduce your debt
At the very least, meet the monthly minimum repayments on your loans. Ideally, try and overpay so you’re not saddled with a debt that’s gathering interest. During a recession, you’re unlikely to have additional income to throw at the problem.

To shrink your debt you could:

Take on a part-time job to boost your income and use that money to shave money off your loan.
Sell unwanted items online using a service like Gumtree or Facebook Marketplace - or even host a garage sale.

2. Review your outgoings
As well as decreasing your debt, reduce your outgoings. It’s worth going through historic bank statements, bills, and receipts to identify how much you’re spending and on what.

Once you’ve identified patterns in your spending, take action. If you’re eating out a lot, cook your favourite meals at home instead. If you buy takeout coffee every morning, invest in a cafetiere and make your drink at home.

Also, look at what you’re spending on services. You may be overpaying for gas, electric, broadband, or water. Use a comparison site to see if you can get a better deal and switch to a cheaper tariff with another provider.

3. Learn to budget better
Putting together a home budget might sound hard but in fact, a lot of the guidance given in this article will form part of your plan. Reducing debt by overpaying on your loans - and reviewing your outgoings - are important activities that you’ll need to repeat month-on-month to budget better.

One way to organise your home finances is by living below your means. This would involve cutting back on non-essential spending. Your household income would be used to cover utility bills, buy shopping, and any other day-to-day items you couldn’t live without.

Build up an emergency pot

By defining a household budget and sticking to it, you’ll have spare money at the end of each month. If you have debts, clearing them will be your priority but you should still drip-feed small amounts into a high-interest savings account whenever possible - because, over time, these contributions add up.

In the case of a recession, your emergency pot could pay for car repairs, replace your income in the event of redundancy, or cover other expensive but unforeseeable events you’d otherwise struggle to pay for.

How could Salad Money help?

We specialise in helping workers get affordable credit unavailable elsewhere. The loans we offer are small, fair, and designed to remove the stress associated with borrowing money.

We also think you’ll love our innovative Open Banking service which means we won’t need to use your credit score.

Apply for a loan online today or, if you have a question, get in touch with one of our experts to learn more.

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