So, what is a recession?
In a normal market-if there is such a thing, a country’s overall economy grows and does well along with the population, and on average, everyone feels good and slightly better off, as the Gross Domestic Product (GDP) of Goods and Services of the country- increases.
But sometimes the GDP value falls, and a recession is usually defined as when this happens for two three-month periods – or quarters – in a row.
The Bank of England has now warned that the UK (United Kingdom) will fall into recession and expects the UK economy to keep shrinking until the end of 2023.
Historically in times of recession, interest rates do not normally increase but reduce to eliviate the pressure.
The difficulty this time is that we have rising inflation and the pressure of a recession combined.
The Bank of England has now raised Interest rates to 1.75% with the predicted inflation rate now set to hit over 13%.
Governor Andrew Bailey said he knew the cost-of-living squeeze was difficult but if it didn’t raise interest rates it would get “even worse”.
If you are worried about the effects on you your family and business, there are some good habits you can adopt to help you through it, so the effects are negligible or not felt at all.
Top 5 tips
Have an Emergency Fund-Lifeboat fund
Make sure you have at least 3-4 months of income or expenditure saved to one side as an emergency fund.
It does not matter where this money is held, but it must be accessible and safe, so probably a bank or building society would be best.
You may never need to use it, but it gives peace of mind in knowing that it’s there to fall back on-a bit like a lifeboat in that you probably won’t ever use it, but it is very reassuring to know it is there in case of an emergency.
In times of a recession keeping that fund topped up and accessible becomes more important.
Clear off any Credit Card Debt
Recent data from the Bank of England showed the average credit card interest rate in the UK was 21.46% at the beginning of 2022.
Aside from any emergency fund, if you have cash on deposit in a savings account or current account, earning 1.5% and have debt on a credit card and being charged 20% for the privilege, it makes sense to clear the debt.
Clearing the debt will reduce monthly outgoings in tough times and in times of a recession, lending underwriting tends to tighten up, so keeping credit cards clear and well below credit limits going forward will help long term.
Also do not fall into the trap of taking on more credit card debt with interest free deals as a debt is a debt is a debt and still needs to be paid back.
Live Within Your Means
It is always a good habit to start living within your means, when the going is good and even more important when times are tough.
As an example, although paying for things like food and fuel on your credit card, gives you a few weeks interest free spending, if you do not pay it all off when the bill comes in, it makes that fuel cost at the forecourt or food at the supermarket even more expensive.
If in the good times you are living off two household wages, see how close you can get to living off one.
In the good times, this tactic may allow you to build up emergency funds and save for the future and even pay down debts such as your mortgage earlier.
In troubled times if one spouse gets laid off, you should be ok because you will already be used to living on one income. Adding to your savings may stop temporarily, but your day-to-day frugal spending lifestyle can continue as normal.
Review your Mortgage
A substantial number of residential mortgages are currently maturing and going from a fixed rate or tracker rate onto a lender’s standard variable rate (SVR) can be quite an increase in monthly payments, so ensuring you retain a competitive interest rate is vital.
You may now find with your mortgage balance reduced and your property value increased, that your actual loan to value (LTV) is lower, so this gives you access to better product rates.
Long-term fixed-rate products rates are increasing, but with bank rates expected to carry on increasing, fixing now for 5 years or more could be very prudent.
This could be good news for homeowners who found themselves wanting to improve their home after spending so much time there in the last 2 years and completing essential repairs.
Raising additional funds as part of the mortgage to convert garages or conduct essential repairs or helping children with mortgage deposits, may now be possible without much impact on the monthly mortgage payments they are used to paying.
Or just switching on to a lower interest rate without extra borrowing could be very benefical and substantially reduce mortgage outgoings and help build up that emergency fund.
Review your Medium- and Long-Term Savings.
Do not be afraid of investment market downturns, in times of recession and sudden market changes it is natural for it to be unsettling and can often bring about challenges.
When job security and strained family relationships are added to the after-effects of the pandemic and the mental hurdles it brought, emotional responses can cloud the ability to make the correct decisions.
Start by reviewing your overall attitude to investment risk and your reasons for investing.
Expect to see cash savings rates increase. Keep an eye on Cash ISA rates and fixed rate bonds.
Although Cash ISA’s are Tax Free, with the introduction of the Personal Savings Allowance (PSA) you may end up not paying tax on deposits such as fixed rate bonds, which often have a higher interest rate.
Of course how much you have on deposit and your tax status will determine this.
Markets have been affected and if you have not looked recently, some fund values will be down over the last year, but if you do not sell, you will not lose anything.
You are invested for the medium to long term and markets bounce back and being in the market for the rises is especially important.
As always if you feel you would benefit from a review, please do not hesitate to contact us