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10 Top Tips to Recession proof your Finances

By Dr Ian Fribbance, The Open University


1. Reduce Your Debts

The number one priority is to reduce any debts, especially unsecured debts such as loans and card balances. They cost you money and can add significantly to your woes if other problems arise. Generally, you should pay off the debts with the highest interest rates first, such as store cards or credit cards. If necessary, you should use your savings or spare cash to help pay off these debts as soon as possible because they cost you more in interest than you’ll be earning on the savings. You might want to keep a small ‘emergency fund’ of cash, but it should only be a very limited amount whilst you still have outstanding debts on a card, otherwise you are wasting money.

2. Build up an emergency fund

Once you have got rid of your debts, the major aim is to build up a cash fund which can be there in case of emergencies. The ‘rainy day’ of the recession may already be here, but job losses and cutbacks will go on for some time yet so the sooner you have savings in place the better. Experts recommend aiming for having at least the equivalent of three months salary in a cash fund, something that for many people is going to require some serious cutbacks.

3. Budget ruthlessly

In order to achieve these two priorities you are going to have to budget very carefully. If you don’t already do so, you should actually write down all the money you spend – on bills, direct debits, and everything you buy whether through cash, cheques or other payments. Then you need to work out how much you spend per month compared to the amount you have coming in. Is it more or less? On which types of expenditure can you work to make cutbacks? Remember you’ve got to generate enough of a surplus to pay back debts and build a cash fund. If you aren’t particularly disciplined you might need to set up separate accounts for certain types of expenditure, put a fixed monthly amount into each account, and then stick ruthlessly to that budget, rather like having ‘piggy banks’ or envelopes for each type of spending.

4. Cut bills and spending wherever possible

Shop around hard to try and reduce costs to help you stick to your new lower budgets. You should look at all the goods and services you buy to see if you can get things for less – utility bills, food shopping, online ordering, insurance, indeed everything you can think of! Ask yourself if you can cut out some spending altogether such as coffees, newspapers, or lunches. The more you can do to cut out spending and to shop around to reduce costs, the smaller your debts and the bigger your emergency fund will be!

5. Think carefully before tying yourself to expenditure

If your sector is likely to be hit hard by the recession and it is possible you could lose your job then you will need to think very carefully about the financial circumstances you would face in that situation – including items of expenditure you have committed to now. This could include loans, school fees, subscriptions to mobile phone payment plans, digital TV or broadband, fitness and gym memberships, clubs and societies, and so on. Do you want to sign yourself up for 12- or 18-months of expenditure if redundancy looms in your sector? Consider any lock-ins very carefully if you are at risk.

6. Reduce your mortgage

Another thing to consider is whether you can pay off some of your mortgage (assuming you have one). If you have already paid off your debts and built up an emergency fund, then this is the next action to consider. Even the small over-payments that you can achieve through careful household budgeting will be helpful (although you will need to check what your particular mortgage allows in terms of overpayments and repayments).  Reducing your mortgage balance will be helpful during bad times, be that because of higher interest rates when the recovery begins or job losses during the recession. And reducing your balance should reduce the chance of negative equity, and improve your chances of a better deal if and when you remortgage – which might be another way to reduce bills, depending on your circumstances.

7. Consider your insurance protection carefully

Are you protecting yourself the best way you can? Consider insurance carefully. There are insurance policies which will provide an income, or cover payments on your mortgage or other debts for two years in the event of unemployment. But you will need to check both the terms and the premiums for these policies carefully, and you might be best to go to an insurance broker if you want the kind of certainty that such a policy can provide. Of course, if you already know you are going to lose your job then this cover will not be of any use as signing up for it in such circumstances would make it invalid.

8. Buy expensive items on credit cards

One of the many problems consumers face in a recession is that stores can go bust – as we have already seen with Woolworth’s, MFI and others! So to avoid losing money on retailers that go bankrupt, buy any goods costing over £100 on a credit card. If the retailer goes bust before you receive your order, the company that issued your credit card will be jointly liable with the retailer itself, so you can get your money back from that card issuer. But this does require some serious self-discipline – make sure you pay off the card at the end of the month and do not incur interest on the bill.

9. Be safe with your savings

This is the mother of all financial crises – we’ve seen bank failures and taxpayer support on a truly colossal scale in the UK and elsewhere. So if you are lucky enough to have a large amount of savings it is imperative you ensure they are safe. That means keeping a maximum of £50,000 per person in each institution you save with – that’s the limit of the deposit protection scheme.

10. Think and act like we are in a financial crisis

Act like the worst has already happened – if you start being careful now, then you are better prepared if things do get worse on a personal level. That might mean a range of other things you want to consider. For example, can you raise some extra cash now to help build up the emergency fund or pay off debts – whether by selling some unwanted things on eBay, or taking some action to earn extra income? If there is a real risk of redundancy, you should starting planning financially like you’ve already lost your job and cut right back on your spending. And everyone will need to think carefully about their personal plans and aspirations and how they can best be achieved during what is likely to be a long recession which will impact on property prices, jobs and pay.

"You and Your Money: Personal Finance in Context"

Dr Ian Fribbance is chair of the popular Open University course You and Your Money: Personal Finance in Context.  The short course helps students of all ages make informed financial decisions and covers four areas: the economic environment; household finances; financial planning and financial changes over a lifetime.

The course has already attracted over 5,000 students since it first launched with registrations up by over 30% this year – a sign of the increased interest in personal finance in the light of the current recession.

The Association of Chartered Certified Accountants endorses the course, which runs again in May.  For more details, go to www.open.ac.uk and search for DB123.

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