How to recession-proof your finances: five steps you can take TODAY

There are actions you can take today to boost your finances in the face of a predicted recession

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The Bank of England has warned the UK will enter a technical recession from October which will last until the end of 2023. It might mean little to most of us who have been juggling high energy bills, rising food costs, erratic fuel prices and rocketing inflation since April.

Yet, while a recession won’t affect everyone in the exact same way, an economic downturn can make life tougher for us all. You or someone you know could lose their job, you may find it harder to get a pay rise and it could be more difficult to find a new job. Shops and businesses you love could close down.

Senior personal finance analyst at interactive investor, Myron Jobson (opens in new tab), says: “With the worst of the cost-of-living crisis seemingly yet to come and the very real prospect of a recession, it remains important to take steps today to bolster financial resilience now to give you some peace of mind in the coming months.

“Many households will want to try taking steps to shore up their finances. It’s worth keeping a spreadsheet of your own spending habits so you can get a better idea of what eats most into your budget, and where you could cut back.

“Other considerations include paying down any debt you may have, starting with the costliest ones and variable rate loans, as well as building a cash buffer for emergency spending.”

Here, we explain five steps you can take to recession-proof your finances today.

1. Set a budget and cut back your household bills 

Trimming your household bills as and when you can is a boring, but easy, win.

For your energy bill, The Money Edit has crunched some numbers to help you decide whether you should switch to a fixed- price energy tariff. Though we can’t be sure how energy prices will change in the future, our analysis reveals that by fixing now, your bills will go up, but over the course of the year you could save money or break even if energy prices do go up by 78% in October as predicted. 

Similarly, we look at whether you should switch to a fixed-rate mortgage and have details on the the best remortgage deals and the best broadband deals.

Contact any of your service providers if you're struggling to pay your bill to find out what options are available to you. Energy firms have hardship funds that, in some cases, involve writing off some of your debt, while around four million people are missing out on cheaper  “social” tariffs on broadband.

When it comes to setting a household budget, you need to look at your essential outgoings - mortgage, rent, bills, travel, food - and income. 

Find a way that suits you: if spreadsheets scare you, you can use your banking app to look at your regular outgoings and write down your expenses on paper. 

Consider a budgeting app like Emma or HyperJar. Hyperjar’s (opens in new tab) prepaid debit card and app offers you a ‘pay now, buy later’ approach and lets you split money into virtual ‘jars’ linked to specific spending which earn you interest at the same time. Meanwhile, Emma (opens in new tab) analyses your current accounts, investments and credit cards to give you an overview of your financial situation in one place. Its analytics provides a detailed breakdown of your spending and highlights any potential payments that are a waste of money. 

2. Find out what money your entitled to 

Around £15 billion goes unclaimed in state benefits every year because people are unaware of their entitlements, according to benefits calculator site Entitledto (opens in new tab)

Child benefit, pension credit, council tax support and marriage allowance have particularly low take-up rates. There’s also over £1bn unclaimed in Child Trust Funds by those who have turned 18 since September 2020.

The quick and easy way to find out if you have cash is to input your details into one of the free online benefits calculators at Entitledto (opens in new tab) or Turn2Us. (opens in new tab) 

3. Shift your debt to a 0% balance transfer credit card 

Borrowing on credit cards grew at the fastest pace since 2005 when £1bn was added to credit cards in June, according to the Bank of England. It’s essential to prioritise paying off any expensive debt: the average APR on a credit card in August 2022 is a shocking 26.6%, according to data analyst Moneyfacts. 

But, if you’re eligible you may be able to lower your cost of borrowing with a 0% balance transfer. This kind of credit card lets you move debt from an old credit card to a new one with 0% interest rate. It’s essentially a cheaper way to become debt-free as you won’t be paying interest on your repayments. 

Interest-free periods of up to 34 months are available: Sainsbury’s and Santander currently offer fee-free 0% balance transfer credit cards. Check to see what deals you are eligible for via GoCompare's eligibility checker now (opens in new tab) 

4. Start ‘Drip feeding’ money into a stocks and shares ISA 

Drip-feeding money into an ISA via a regular monthly investment tends to be lower risk than paying in a big lump sum. This is because drip-feeding means you avoid putting your lump sum in just before a market crash and seeing the whole amount lose value.

Say you invest £50 a month. In the first month, let’s say the share price of what you’re investing in is £2.50 - this lets you to buy 20 shares. If the share price falls to £2 the following month, your regular investment of £50 will now buy 25 shares, leaving you with 45 shares in total and feeling satisfied when the share price rises. If the share price falls again, your monthly £50 will buy even more shares.

However, if you purchase all your shares in one go with a lump sum of £600 (the same amount as someone investing £50 each month for a year), you will buy your shares at the price being levied at that particular time. If you catch a bad break and the share price is £3 you’ll have 200 shares with no prospect of buying more at a lower unit price.

Investing regularly essentially ‘smoothes out’ the cost of investing. 

5. Calculate and time your pension withdrawals 

When you withdraw cash from your pension as the stock market rises, those withdrawals are partially offset by investment growth. However, if you have to withdraw when markets fall, more holdings have to be sold at a lower price to provide the same level of income. It means that the value of your pension shrinks more quickly.

Inflation makes this worse and leads to the ‘double depletion’ effect: You need to withdraw more money to pay bills because the cost of everything is rising, but at the same time your pension pot is getting less valuable.

Becky O’Connor, head of pensions and savings at interactive investor, says: “Don’t panic, sell your pension investments. Exercise caution over how much income you withdraw and keep your fund invested in the stock market as long as possible. Cashing in while inflation is so high represents a guaranteed real loss. While stock markets have been volatile, they still represent a better chance for gains over inflation than a savings account.”

Pensioners also potentially miss out on thousands of pounds worth of income when they don’t shop around for the best annuity option.

Katie is staff writer at The Money Edit. She was the former staff writer at The Times and The Sunday Times. Her experience includes writing about personal finance, culture, travel and interviews celebrities.  Her investigative work on financial abuse resulted in a number of mortgage prisoners being set free - and a nomination for the Best Personal Finance Story of the Year in the Headlinemoney awards 2021.