Follow our 8 easy ways to safeguard your finances

A recession may well be on the horizon. The economy shrank in March and April, and the Bank of England predicts that growth will ‘slow sharply’ from here. 

Should the economy hit a downturn, unemployment could rise, house prices level off – or even fall – and household finances could be squeezed even tighter. 

Of course, a recession is not a given and the economy could prove more resilient than some experts suggest. There are many bright spots amid the gloom. However, even if we avert a downturn, it always pays to be prepared. Here are eight things you can do now in case there are some bumpy months ahead. 

Look after your cash: Even if we avert a downturn, it always pays to be prepared

1) Protect your income 

Millions of households are already finding it hard to keep up with bills. Over a quarter would struggle to pay their bills within one month of losing their income, according to think tank the Resolution Foundation. 

Insurance is one way to protect yourself from loss of earnings due to illness or unemployment. This requires a monthly outlay, but could be worth thousands of pounds should the worst happen. 

Income protection insurance covers you if you are incapacitated and cannot work. The most expensive policies pay you a monthly income until you hit retirement age or even beyond. Cheaper ones pay out for a fixed term of one, two or five years. 

Some policies cover redundancy. These policies were hard to come by when the pandemic struck, but have become increasingly popular since. The number of policies covering unemployment, sickness and accidents taken out in the first three months of this year doubled in comparison to the previous quarter. 

The cost of cover depends on your health and lifestyle, whether or not you smoke and the type of job you do. But as an example, a 45-year-old non-smoker in good health and earning £45,000 a year could get income protection worth £2,000 a month until the age of 65 from £27, with payments starting three months after they first stop working. They could get life cover from £21 a month that pays out £250,000 should they die within 25 years.

2) Protect your mortgage 

If you lose your income or house prices fall, it can be harder to remortgage. So, if you are worried, it may be worth locking into a good deal now. Planning ahead can be helpful regardless, especially if interest rates continue to rise. 

Jamie Lennox, director of adviser Dimora Mortgages, says: ‘If you are in any doubt about the security of your job should the economy take a turn for the worse, fix your mortgage so you can budget safe in the knowledge that your repayments won’t go up.’ He adds that if you know for sure your household finances will be hit, lenders will factor that in to their lending decision. Imogen Sporle, head of term finance at specialist broker Finanze, adds: ‘If we see house prices drop and clients sliding into negative equity or close to it, they will struggle to remortgage, although there will almost always be a lender who can help. 

‘We can all hope for the best but it’s a good idea now to start planning for the worst. Those savings you were going to use for a new car might now be worth keeping in the bank to pay down some of your mortgage when you come to refinance at the end of your fixed period.’ 

Watch out for early repayment charges if you are already on a fixed mortgage, although in some cases it may make sense to pay them to lock into a good deal. You can also start shopping around a few months before your current deal comes to an end.

3) Diversify your income

If there is an economic downturn, it could be helpful not to rely on one source of income, such as your job or investments. You could diversify now to boost your resilience. 

Claire Flynn, mortgage expert at Money.co.uk, suggests taking in a lodger to make money from a spare room. ‘You can currently earn £7,500 tax free annually under the Government’s Rent-a-Room Scheme,’ she says. 

‘Plenty of people do this and in a competitive rental market it should be fairly easy and could take the pressure off.’ 

Other options include having a side hustle – in other words another way of making money, such as making and selling crafts or renting out your driveway. Equity release is another option if you own your home and need to boost your income. It can be useful for pensioners who are locked into fixed rate annuities and are finding their lifestyles are becoming unaffordable. This is not a decision to be made lightly, however. 

Tom McPhail, director of public affairs at research firm The Lang Cat, says: ‘Equity release won’t be for everyone, it generally isn’t suitable at younger retirement ages. 

‘However, many people who could benefit from it. Those who are asset-rich but income-poor should investigate whether it could be a useful solution.’ 

4) Reduce your bills 

There is little we can do about soaring energy prices, which are set to rise once again in October to close to £3,000 on average. 

However, you can find ways to use less. Insulating your home can help cut energy bills by hundreds of pounds. A bit of draught proofing can also make all the difference. Do it now while the sun is shining. 

Go to gov.uk/improve-energy-efficiency for ideas of what you can do and to check whether you may be eligible for a grant. 

5) Protect your investments 

Investors are having a tough time with volatility and falling portfolio values. But, you do not lock into losses unless you sell. Until then, there is a chance that over the medium or long term your investments will recover. 

Therefore think hard before selling, and make sure that it aligns with your strategy and is not just a knee-jerk reaction caused by fear. 

If you are still investing, don’t forget that while the value of your existing holdings may take a tumble, you’re picking up new ones at a cheaper price. 

I have locked in stability with a 7-year mortgage 

Strategy: Joe Seager knows what his monthly loan cost will be

Joe Seager is worried about the uncertain outlook for the economy and so has locked in stability where he can – by fixing his mortgage for the next seven years. 

The 36-year-old, who lives in Lancashire with his wife and three young children, is relieved that he has locked in at a monthly price that they know they can afford.

‘My wife and I are both self-employed and it can be hard to chase invoices and find a decent work-life balance at times,’ he says. 

‘Locking in our mortgage at 1.99 per cent should help protect us at least in this area of spending, against any issues with the economy. 

‘We also make overpayments to reduce the balance and interest.’

6) Protect your retirement income

If you are living on your savings, you may want to rethink your strategy. Tom McPhail explains: ‘With values reduced by stock market falls, you’ll need to sell more investments to generate the same level of cash. But, once they’re gone, they’re gone. Instead, as much as you can, try to live off the income generated by your investments, such as the dividends from shares and interest from bonds.’ 

Becky O’Connor, head of pensions and savings at wealth platform Interactive Investor, adds that those considering withdrawing their 25 per cent tax-free lump sum from their pension should think twice.

‘It might be best to delay taking it out if you can and if you take it, be very careful about what you spend it on,’ she says. ‘If you’re taking money to do up your home in the hope that it increases its value, be careful. 

‘In a housing market that also looks set to turn, home improvements might not yield the return on investment they did five years ago.’

7) Claim what you are owed now 

Claim all the benefits you are entitled to. Even if you’re managing now, you may be thankful for it if things take a turn. 

‘In the good times, we might feel we can afford to let a few things slip and don’t actually need to go through the process of claiming for discounts and benefits,’ says O’Connor. ‘But in hard times, you will be glad you did.’ 

The Government has a tool to check what benefits you may be entitled to. Go to gov.uk/benefits-calculators. 

If you are struggling to pay loans and bills, get in touch with your providers as soon as you can. A total of 52 per cent of borrowers in financial difficulty wait more than a month before seeking help. 

Of these, over half regret not doing it sooner, according to new figures from the Financial Conduct Authority. Citizens Advice and the debt charity StepChange can also offer advice if you’re struggling. 

8) Dig out your old vouchers 

UK households waste millions of pounds on vouchers that go unspent. If you have some lying in a drawer somewhere, now might be a good time to use them. Some vouchers have an expiry date, after which they become worthless. Furthermore, if the retailer goes bust, the vouchers may not be honoured.