A recession may well be on the horizon. The economy shrank in March and April, and the Bank of England predicts that growth will “slow sharply” from here on out.
If the economy faces a downturn, unemployment could rise, house prices would level off – or even fall – and household finances could be squeezed even harder.
Of course, a recession is not a given, and the economy may prove more resilient than some experts believe. There are many bright spots among the gloom. However, even if we’ve avoided a recession, it’s always worth being prepared. Here are eight things you can do now for the tough months ahead.
Watch your money: Even if we’ve avoided the recession, it’s always worth being prepared
1) Protect your income
Millions of families are already struggling to keep up with their bills. More than a quarter struggle to pay bills within one month of losing income, according to think tank Resolution Foundation.
Insurance is one way to protect yourself against loss of earnings due to illness or unemployment. This requires a monthly fee, but could cost thousands of pounds if the worst happens.
Income protection insurance covers you if you are disabled and unable to work. The most expensive policies pay you a monthly income until you reach retirement age or even beyond. Cheaper ones are paid for a certain period – one, two or five years.
Some policies cover excess. This policy was hard to find when the pandemic started, but has since become more popular. The number of unemployment, sickness and accident policies taken out in the first three months of this year has doubled compared to the previous quarter.
The cost of coverage depends on your health and lifestyle, whether you smoke or not, and the type of work you do. But as an example, a 45-year-old non-smoker in good health earning £45,000 a year could get £2,000 a month of income protection until age 65 from £27, with payments starting three months after of how they first quit smoking. is working They can get life insurance from £21 a month, which pays out £250,000 if they die within 25 years.
2) Protect your mortgage
If you lose income or house prices fall, it may be more difficult to remortgage. So if you’re worried, maybe now is the time to grab a good deal. Planning ahead can be helpful in any case, especially if interest rates continue to rise.
Jamie Lennox, director of adviser Dimora Mortgages, says: “If you’re in any doubt about your job security when the economy takes a turn for the worse, fix your mortgage so you can be secure in the knowledge that your payments will benefit.” t get up. He adds that if you know for sure that your family’s finances will suffer, lenders will factor that into their lending decision. Imogen Sporle, head of term finance at specialist broker Finanze, adds: “If we see house prices fall and customers jump into or close to negative equity, it will be difficult for them to remortgage, although there will almost always be a lender who can help.
“We can all hope for the best, but it’s a good idea to start planning for the worst now. Those savings you were going to use on a new car might now be worth keeping in the bank to pay off part of your mortgage when you come to refinance at the end of the fixed term.’
Watch out for early repayments if you already have a fixed mortgage, although in some cases it may make sense to pay them off to get a good deal. You can also start shopping months before the current deal ends.
3) Diversify your income
When there is an economic downturn, it can be beneficial not to rely on a single source of income, such as a job or investments. You can diversify now to increase your resilience.
Claire Flynn, Money.co.uk’s mortgage expert, suggests taking in a lodger to cash in on a spare room. “At the moment you can earn £7,500 tax-free every year on the government’s rent-to-own scheme,” she says.
“A lot of people are doing it and in a competitive rental market it should be pretty easy and can take the pressure off.”
Other options include a side hustle—in other words, another way to make money, like making and selling crafts or renting out your driveway. Equity release is another option if you own a home and need to increase your income. This can be useful for retirees who have a fixed rate annuity and find that their lifestyle is becoming unaffordable. However, this decision should not be taken lightly.
Tom McPhail, director of public affairs at research firm The Lang Cat, says: “Equity release will not be for everyone, it is generally not suitable for younger retirement ages.
“However, there are many people who could benefit from this. Those who are asset rich but poor should explore whether this could be a useful solution.”
4) Reduce your bills
There is little we can do about the sharp rise in energy prices, which will rise again to an average of £3,000 in October.
However, you can find ways to use less. Insulating your home can help cut your electricity bills by hundreds of pounds. A little rough-checking can also go a long way. Do it now while the sun shines.
Go to gov.uk/improve-energy-efficiency to find out what you can do and check if you are eligible for a grant.
5) Protect your investment
Investors are going through a tough time due to volatility and falling portfolio value. But you won’t record a loss if you don’t sell. Until then, there is a chance that your investment will recover in the medium to long term.
So think carefully before you sell, and make sure it’s in line with your strategy and not just a fear-driven reaction.
If you’re still investing, remember that while the value of your existing holdings may drop, you’re buying new ones at a lower price.
I have settled into stability with a 7 year mortgage
Strategy: Joe Seeger knows the monthly cost of the loan
Joe Seeger is worried about the uncertain outlook for the economy, so he’s gotten stability where he can — by fixing his mortgage for the next seven years.
The 36-year-old, who lives in Lancashire with his wife and three young children, is relieved to have locked down a monthly price they know they can afford.
“My wife and I are self-employed and sometimes it can be difficult to keep track of invoices and find a decent work-life balance,” he says.
“Locking in our mortgage at 1.99 percent should help protect us, at least in that cost area, from any problems with the economy.
“We also make overpayments to reduce the balance and interest.”
6) Protect your retirement income
If you’re living on your savings, you might want to rethink your strategy. Tom McPhail explains: “When prices fall due to a fall in the stock market, you will need to sell more investments to get the same level of money. But when they’re gone, they’re gone. Instead, as much as you can, try to live off the income generated by your investments, such as dividends from stocks and interest from bonds.”
Becky O’Connor, head of pensions and savings at wealth platform Interactive Investor, adds that those planning to withdraw a 25 per cent tax-free lump sum from their pension should think twice.
“It might be better to delay spending it if you can, and if you do take it, be very careful what you spend it on,” she says. “If you are taking money to do up your house in the hope that it will increase its value, be careful.
“In a housing market that also looks set to turn around, home improvements may not yield the return on investment they did five years ago.”
7) Demand what you are owed now
Claim all the benefits you are entitled to. Even if you’re managing now, you can be thankful for it when things turn around.
“In good times, we can feel like we can let some things slide and not really have to go through the process of claiming rebates and benefits,” says O’Connor. “But when times get tough, you’ll be glad you did.”
The government has a tool to check what benefits you may be eligible for. Go to gov.uk/benefits-calculators.
If you are struggling to pay your loans and bills, contact your suppliers as soon as possible. A total of 52 percent of borrowers with financial difficulties wait more than a month before applying for help.
More than half regret not doing it sooner, according to new figures from the Financial Conduct Authority. Citizens Advice and the charity StepChange can also offer advice if you are struggling.
8) Dig out your old vouchers
British households spend millions of pounds on vouchers that go unspent. If you have any in a drawer somewhere, now is the time to use them. Some vouchers have an expiry date after which they become useless. Also, if the retailer goes bankrupt, the vouchers may not be honored.
Some links in this article may be affiliate links. If you click on them, we may earn a small commission. This helps us fund This Is Money and stay free to use. We do not write articles to promote products. We do not allow commercial relationships to influence our editorial independence.