The last few years have been eventful to say the least with Brexit, the pandemic, war in Ukraine, the death of Queen Elizabeth II, and a rollercoaster ride of economic ups and downs.
But as Walt Disney once espoused with his characteristic optimism: “All the adversity I’ve had in my life, all my troubles and obstacles, have strengthened me. You may not realize it when it happens, but a kick in the teeth may be the best thing in the world for you”.
According to inews, the Office for Budget Responsibility (OBR) forecasts that the current UK recession is likely to last until at least 2024 as Britons brace for more tough decisions in the near future.
So, as you prepare to overcome the latest in a series of economic obstacles, it is important to understand how you can potentially protect your wealth and stay on track to meet your long-term goals.
Read on to discover five proactive ways to navigate the UK recession and protect your interests.
1. Begin by reviewing your outgoings and looking at possible reductions
It could be a prudent move to start by evaluating your monthly budget and considering whether all your current outgoings are essential or necessary. As much as you may not want to make cuts to some areas such as luxuries, it could be a beneficial move during the short-term instability.
It isn’t required to remove all your creature comforts from your outgoings, but it is important that you’re living within your means as it could provide a vital financial buffer should you be negatively affected by the recession.
A more streamlined and efficient budget could also benefit you in the long term by leaving you in a healthier position to consider future additional outgoings should the opportunity arise.
2. Ensure your savings are protected from inflation and set aside an emergency fund
High inflation can have a significant eroding effect on the “real” value of your savings over time. This remains a problem despite Forbes reporting that industry sources predict inflation will have dropped to around 3.9% by the end of 2023.
According to the Office for National Statistics (ONS) inflation is currently 10.7% in the year to December 2022, significantly higher than Moneyfacts best reported rate of 4.33% on one-year fixed savings (as of 21 December 2022).
This means that if you were to have saved £1,000 in a one-year fixed savings account a year ago, at today’s best rates it would now be worth £1,043.30, while £1,000 of goods and services a year ago would cost you £1,107 today at the current rate of inflation.
So, it’s vital that you don’t allow your money to stagnate in a savings account with low interest rates compared to currently high inflation levels. It could be beneficial to consider investing any surplus funds to generate the growth needed to keep you on track to meet your long-term goals.
However, before transferring any money, you might want to set aside an emergency fund for a worst-case scenario with at least three months’ worth of essential bills such as rent, utilities, taxes, and groceries covered.
3. Safeguard your income with protection
One unfortunate side-effect of the recession is that it will likely lead to rising unemployment and job losses.
There are ways you can protect yourself, beyond preparing an emergency fund, and ensure you are in a position to continue to pay crucial outgoings. One such way is income protection.
It is possible to choose cover that will protect against redundancy.
The cost can vary greatly depending on your:
- Length of coverage
- Maximum sum assured.
Affordable options might cover you in the short term, while the more expensive plans could cover your annual income until your retirement.
4. Proactively review your debts and stay ahead of rising interest rates
In an attempt to combat increasingly high levels of inflation, the Bank of England (BoE) has raised its base rate nine times since it hit an all-time low of 0.1% in March 2020. As of 15 December 2022, the rate sits at 3.5% and is predicted to rise again in 2023.
Rising interest rates can be beneficial for savers, but can pose a challenge to individuals with variable-rate debts, such as a loan, credit card, or mortgage. They could be exposed to rapidly increasing monthly instalments and an increase in their overall debt obligation.
Opting to consolidate loans and credit cards under a new fixed-rate loan agreement could potentially protect against the risks posed by increasing debt payments.
Similarly for mortgages, one option that may be advantageous in the long run might be to consider a move to a fixed-rate mortgage, which could provide you with added security over remaining on a variable-rate agreement.
It is important to seek financial advice before making any big decisions and ensure you’ve thoroughly reviewed your options so that your wealth is protected in both the short and long term.
5. Don’t panic and assess your investments in a calm manner
The theory of “loss aversion” posits that individuals are primed to feel the pain of losses twice as much as the joy of gains. This can leave you instinctually inclined to make emotionally charged decisions when faced with the fear caused by an unstable market.
It is important that you stay calm and carefully consider all your choices.
Investing can be risky, and a recession can sound scary. But it should be noted that a recession refers to the economy — and the stock market isn’t the economy.
Stock markets will likely ebb and flow over the short term, but over the long run have typically followed an upwards trajectory and seen positive returns for investors.
According to IG, the FTSE 100, the UK’s leading stock market index, saw positive average annual returns of 8.43% over any 10-year period between 1984 and 2019.
Selling during a downturn converts a “paper loss” into an actual one and removes the possibility of your investments rebounding, and potentially growing in the long term.
Investing during a recession can have positive benefits such as taking advantage of lucrative opportunities presented by any decreases in share prices. So, when the stock market eventually bounces back, you could reap significant rewards.
Get in touch
The economy generally recovers given time. 2024 might seem like a long time away, but in the grand scheme of things, it’s but the blink of an eye.
If you have any lingering worries about your savings or investments, and how to potentially navigate the recession, you should contact us by email at firstname.lastname@example.org or call 0117 9303510.
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
Investments carry risk. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.