There’s been a lot of talk recently, both in the US and in the UK, about whether we are heading for recession? Economists are divided on this but most are prepared to say, at least, that we look set to see a downturn that may or may not turn into a full-blown recession.
When considering money matters, it’s always important to be prepared for the worst and therefore the focus of this article is what you should do to mitigate the potential harmful impacts of a recession. I guess you could see this exercise as being a bit like what happens when a storm is coming. Boats get taken in, windows boarded up, sandbags put in place. With regards to your finances, there are some equivalent actions that you can take that will increase the likelihood that you can ride out any financial storm.
Safety net savings fund:
The most obvious thing you can do is to make sure that you have stockpiled some money into an instant access (or easy access) savings account. The worst consequence of recessions are that there are job losses. In considering your savings, do you have enough money set aside for cover things like mortgage payments (in the short term) if you were to be made redundant? Typically, financial advisers state that you should look to have between one to three months worth of living costs set aside for this eventuality. Of course, it’s important that you make sure you’re getting a good rate of interest on your chosen savings account(s).
Don’t put all your eggs in one basket:
There has been a lot of focus in recent times on the chaos that has been engulfing the financial sector. In the US, we’ve seen investment bank Bears Stearns go bust, whilst in the UK Northern Rock had to be rescued and nationalised by the UK government. One of the discussion points in the wake of these failures has been how safe your money is with your bank? For the most part it’s pretty safe, especially if you’re with one of the really big banks. Additionally, in the UK at any rate, there is a savings compensation scheme (backed by the Financial Services Authority) that protects your first 35,000. So, if your bank goes bust, the FSA is guaranteeing that you will get your money back as long as it’s not in excess of 35,000. Some people with high savings balances have chosen to split their savings between several banks, placing no more than the 35,000 threshold with any one bank.
It’s important to budget and limit expenditure all the time but it can be particularly sensible if you fear that your job could be under threat. Review your monthly expenses and work out which categories of spend can be reduced. You might decide to end that gym membership that you hardly make use of. Or to eat out less, or go for a home holiday rather than an expensive overseas one. A little prudence now could prove very beneficial if things do get rough, and if they don’t, well you’ll simply have a bigger savings balance which is always good!
Consider ways to make extra income:
When a recession grips, one of the first things that happens is that companies tighten their belts and that means lower annual pay rises. To prevent inflation from eroding your financial muscle, you could consider ways to earn some extra income. Writing for Helium is just one. Depending on your skills and abilities, you might give music lessons, or get a weekend bar job, or any other of thousands of ways that people can make money.
Work to safeguard your current job:
Redundancies are a fact of recessions. However, hopefully you won’t be one of the casualties. The more integral to the business that you can make yourself, the less likely that you will suffer if there are redundancies. Companies generally don’t want to lose their best staff so all the more incentive to make sure that you hit your sales targets, or deliver your projects on time.
Hopefully, the economic winds won’t be too severe and all the talk of recessions will pass. However, there’s no harm in applying a little financial prudence now, so that you are well placed to ride out any storm that might come.