I was debating here whether to name the title 'How to Thrive in a Recession' but I thought before you can thrive, you have to make sure you can survive. I'm going to go through some checks and strategies to go through to assess what you need to do.
We are currently experiencing ridiculously high inflation rates which leads to the suspicion a recession is on it's way or we are already in one. With either high inflation or in times a recession a few things can happen at various points.
1/ Lower real-time salary
2/ Higher risk of job loss
3/ Higher cost of living
4/ Higher interest rates
Ultimately things are less stable and you are more exposed to risk. So, whilst you may not be feeling the pinch of any of the things listed above you may do at some point in the near future. In my mind you want to start prepping now, reduce the risk and be prepared should the less-than-happy-time actually happen.
This would be what I would do and these are in no particular order in priority on how you should tackle them.
1/ Do not take out any finance or credit products.
Taking out a 4-year loan or agreeing to a 4-year lease on a car right now would be pretty dumb. Depending on your financial position it can at any point be pretty dumb, but there are some positions where it's OK. If you are in a financially secure position and the economy is stable, then it's a great way to own an awesome car that you know is of good quality and is reliability. However, if you commit to £300-£500 per month being taken out of your account for the next 4 years you better be bloody sure you are in a solid job and that you have set salary increments coming up.
If not then if you were to lose your job and, in a market where no-one is hiring your car finance people couldn't give a damn, they still want their money. If the cost of living goes up (which it already is) and you don't have the flex in your budget for it, again those car payments will still be needed, so perhaps to get by you could cut down on eating....
This principle goes for anything you get on finance that you can't afford now.
Do you really need to upgrade your telly?
Could you instead look at second hand options for that dishwasher or furniture?
With there being so much uncertainty with job markets, and the squeeze created by the cost of living, locking yourself into a contract where you have to pay a set amount for the next few years is like a noose around your neck.
2/ Buying a house
Exactly the same principle for the above example but on a much bigger scale.
I bought my house (with a massive % of mortgage we only had 10% deposit) a few years ago and I am happy I did. However, with the potential rates change in November next year when my fixed-rate mortgage end I could be really struggling depending on what happens between now and then with the UK economy. Ramit Sethi has a really good outlook and argument for renting versus buying. I feel like in the UK the culture is very anti-renting but I have changed my view on all this. There is definitely a time and a place for it and perhaps you need to ask that question to yourself.
If you have a house then not a lot you can do now to change that, but if you are thinking of buying then perhaps you should wait a bit when there is stability?
If you have a house you may be at the mercy on the mortgage rates change. Damien Talks Money has released a really good video on options in todays UK climate on how to tackle this. It's certainly worth a watch - check it out here.
3/ Clear your debt
Now this may sound obvious and is perhaps something regardless of the economic climate you should be doing this anyway. I do understand people who perhaps have low amount of high-level interest but want to start investing so they can maintain the motivation of FI as investing is way more fun than clearing debt, so they do both in conjunction. But with the uncertainty of the future economy you don't want to have any fixed outgoings if you can avoid it. The plan for the next few months focus on wiping out any debt that is causing a direct debit eating at your salary.
You can as well generally overpay some car finance options, do this if you can - it feels great and when I did it was like getting an extra £250 per month in your bank account!
4/ Be honest with your Emergency Fund
Do you really have enough if you were out of work?
Do you have enough if you need to do a home repair or car replacement/repair?
If you don't, get it sorted now. Because if you lose your job and you don't have anything to tie you over, you'll go into debt by just living (see point 3) or you'll eat into your investments.
General rule is 3-6 months of monthly outgoings and depending on the security of your work you may want to go for more.
5/ Set up the sinking funds.
Look ahead to the next 12 months and see what big known outgoings you have got.
Home and car insurance plus some servicing? Maybe a holiday or some school uniforms to buy?
These won't go away or magically pay for themselves. Figure out how much they cost last year and divide that total by how many months you have left before you will need to pay them, then automatically have it set up into another bank account you can't touch. Insurance for home and car was £500 and due in 5 months? Well then put away £100 each month and then when it's due it's less of a hit.
Sinking funds is probably one of the best things I started over 18 months ago.
Whenever a weekend away, or registrations to professional bodies come around I have a "secret" stash ready and waiting. No changes to my debt levels or investing and emergency fund contribution.
If you made it this far you may be thinking that some of these were very obvious and they are just general basic financial strategies that everyone should be doing all the time.
Correct. They are. But are you applying them all? Be honest
If all goes a bit rubbish in 6, 12, 18 or 24 months' time will you be ready?
If it all went wrong tomorrow I would be in an OK position. My mortgage could make it tight in the future with potential increases and I would need a higher level of emergency funds - currently at 2 months.
In 12 months time I will be in an even better position. But if I did nothing and then I was in a rubbish position it's not like I didn't know this was coming. It wasn't as if I didn't know I could have done.
Help future 'you' by getting the basics sorted and taking accountability for your situation.
What else would you ask to this list?
Find out for the next instalment on how thrive and what changes I am doing to try and get to this position!
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