With the cost of living on the rise, interest rates remaining low and economic growth slowing sharply the possibility of a 2022 recession has started to become a reality. A recession can have a significant impact on everyday finances, with a weaker economy usually leading to higher redundancy rates and lower pay. If you are concerned about how an economic slowdown or recession in 2022 will affect your personal finances, there are a few steps you can take to protect yourself so that you make it through financially unscathed.
What is a recession?
When a country is running well, the value of the goods and services it produces – its ‘gross domestic product’ or GDP – grows. However, during an economic downturn, this value drops. When the GDP drops for two consecutive quarter-periods, this is a sign that the economy is becoming weaker.
Is a 2022 recession likely?
The UK economy has been in recovery from the pandemic-related downturn in 2020, but this recovery is beginning to slow down. In November 2021, the Office for National Statistics disclosed that the UK’s rate of recovery was falling behind the rest of the G7 (Canada, France, Germany, Italy, Japan and the United States). This was mainly down to supply chain disruptions and cautious levels of spending.
The economy grew by just 1.3 per cent in the third quarter of 2021; a sharp slowdown from the 5.5 per cent growth in the second quarter. The UK economy remains 2.1 per cent below its pre-pandemic size.
The recession alarm bell has already been sounded by analysts at global investment research firm Gavekal, who said that “supply chain issues and energy shortages are likely to worsen in the coming months, which will push sterling lower,” adding that “The combination of fighting inflation at a time of high energy prices means that the UK economy will likely face a recession in 2022.”
How to protect your personal finances during a recession?
There are various ways in which you can protect your personal finances and money in 2022.
Pay off debt
Wherever possible, try to settle any large debts you have. If you have more than one debt, address the ones with the highest interest rates first before moving on to the next. If it is not possible to pay off the debt, enquire as to whether you can move to a lower interest rate.
Build up a contingency fund
If you have any money left over once all the bills are paid each month, start building an emergency cash fund. This will help to protect you from any unexpected bills without having to borrow as well as helping you cope with a period of unemployment.
A good rule of thumb is to try and put away 3-6 months’ worth of your average expenses, which is the average amount of time it takes to find a suitable replacement job.
Take investment advice
Whilst it may seem counterintuitive, a recession can often be a good opportunity to invest. Providing you have a good contingency fund in place, and are not overly risk averse, it may be worth taking professional investment advice to see if there are ways in which you can make your money grow.
Generally, a defensive investment style tends to work during a recession, which means choosing stocks and funds that are resilient at all stages of the economic cycle. Whilst spending on luxury goods falls during periods of economic downturn, everyday items such as medicines toilet paper will rarely suffer.
Look into an additional source of income
Even if you have a secure, full-time job, it is never a bad idea to have some form of additional income. Whether you buy and sell on an internet auction site, offer consulting services or publish a blog with affiliate income, you will benefit from diversifying your income streams. That way, if one stream is lost, you’ll have the other one to fall back on. It may even be that once the recession is over, you have a thriving new business.
Diversify your investments
Just as it can be beneficial to spread your income streams, so the same can be said for your investments.
If possible, you should try to build a portfolio of investments that are not connected. So when one is up, the other is down, and vice versa. It is also wise to consider assets and stocks in industry sectors that are not related to your primary occupation or income stream.
Remember, professional investment advice from an independent expert is vital whenever you are planning investments.
Maintain a high credit score
When the economy tightens and lines of credit become more difficult to access, it will be those with excellent credit ratings who will be approved for any form of lending. Keep your credit score high by keeping credit cards open, paying your bills on time and maintaining a low ratio of debt to available credit.
If you are facing difficulties in paying your creditors, be sure to keep in touch with them and try to make arrangements to keep your accounts in good standing. Many lenders would rather retain you as a customer than have to write your account off as a bad debt.
Implementing such financial strategies won’t just serve you well during a recession; they will also help you regardless of what’s happening with the economy.
Looking to recession-proof your finances? Talk to Partridge Muir & Warren.
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