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Recession-proof your finances

FORECASTS for the UK economy and its recovery are coming thick and fast. They follow a warning from the Bank of England last month that the economy is facing its worst downturn in 300 years. Chancellor Rishi Sunak has confirmed it is very likely we are in the middle of a ‘significant’ recession.

A V-shaped, swift recovery is what most are hoping for with things quickly returning to normal once lockdown is lifted. But a second spike of the coronavirus threatens whatever recovery is ahead

The proportion of households worrying about money has fallen for first time from 20% to 19%, says a new study by comparethemarket.com. But the long-term financial impact of pandemic remains a worry. Here’s how to put your finances in the best possible position for the rocky ride ahead.

Investments

Investor discipline is all about riding the storm. Many investors are buying up stocks that have been hit by coronavirus, but will emerge stronger during the recovery as well as those that will prosper from the stay-at-home culture such as Netflix, Zoom and Amazon.

But diversification is key – now more than ever. Hold a mix of cash, fixed interest and shares spread across global markets and be prepared to be patient. Investors should not try to time new investments. You are better off establishing a regular savings habit where you drip-feed your money into your chosen investments. It ensures you benefit from pound-cost averaging where you automatically buy more units when prices are low.

Pensions

If you’re still a long way from retirement, there’s time for your fund to recover. Covid-19 has caused more than 3 million people to interrupt their retirement saving plans, by either reducing or entirely stopping their pension payments, according to research by Scottish Widows. But those who do so could see a significant loss of income in retirement — try to maintain your contributions.

Investments you make today when markets are lower mean that you can get more bang for your buck ie you get more units with the same amount of money, which will stand you in good stead when markets eventually rise. Stock markets have recovered from all previous crashes.

If you are soon to retire, making decisions about what to do with your pension investments right now is more difficult than normal due to the volatile nature of markets. You could consider delaying accessing your pension until things have settled down.

If you have already retired and are drawing on retirement savings via income drawdown, it’s essential to review and monitor how much you are withdrawing from your pension pot to make sure it lasts as long as you need it to. If you feel you cannot make the decision alone, enlist the help of a financial adviser.

Mortgage

Get the very best deal you can. Around a third of homeowners are forking out much more than they need to by paying lender’s standard variable rate, which is around 4.5%.

There’s plenty of appetite from banks and building societies to lend at the moment. Some lenders are cutting mortgage rates to ever lower levels, so it’s worth a look to see if you can re-mortgage to a better deal.

If you’re worried about paying your mortgage because of a fall in income, the mortgage payment holiday scheme has been extended until the end of October. It means you don’t have to make monthly repayments, but be warned that interest still gets charged to the balance. Speak to your lender to get a holiday approved – don’t just cancel your direct debit.

Rainy day savings

A cash buffer is important as a fallback should you need it for an unexpected bill – or sudden loss of income. Many households have managed to save some money during lockdown as spending on non-essential items has fallen.

Figures from the Bank of England this week showed the UK saved £16.2 billion in April. In the six months to February households saved an average of £5 billion every month. An Aviva study claims that the typical UK household could be saving £171 per week.

If you have managed to hang on to your income and have found your bank balance looking healthier than usual, now is a great time to top up your rainy day savings. Choose a best buy savings account or Premium Bonds if you feel you might be due some luck.

Debts

Now is a good time to think about chipping away at any expensive debts. The Bank of England reported that £5bn of credit card debt was cleared during April, which was more than double the previous record of £2.4 billion paid off in March. In a typical month just £300 million of credit card debt is cleared.

If you have a credit card balance, try to pay it down. If you have a 0% deal and were planning to transfer the balance again when it expires, you should prepare for perhaps not being able to do so. Acceptance criteria are rapidly being tightened by lenders, which mean 0% cards might become more difficult to get.

Spending

Take some time to assess whether you could continue to cut out some of the non-essential spending that sees your salary disappear quicker than you would like each month. Nobody wants to see their favourite café go bust but you might consider reducing your daily habit of take-away coffees when things get back to normal, for example. The extra money saved by being a little more frugal can be ploughed into savings and investments, overpaying on your mortgage or your pension or paying off debts – whatever makes sense for you.


Photo by Piotr Chrobot on Unsplash

2020-06-10T12:52:50+01:00

About the Author:

Holly Thomas
Holly Thomas is an award-winning financial journalist and former Deputy Personal Finance Editor at The Sunday Times. She writes across all areas of personal finance and consumer issues, specialising in investments, mortgages and property. Previously she worked at the Daily Express and Sunday Express as Money editor and also at Financial Times Business. Holly was voted Freelance Journalist of the Year at the HeadlineMoney Awards in 2016. Her work can be seen in national press including The Times, The Daily Telegraph and the Daily Mail. Follow Holly on Twitter: @holly_thomas_

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