A recession is defined as two consecutive quarters where the economy, as measured by Gross Domestic Product (GDP), shrinks. In the last 3 months of 2011 the economy shrank by 0.3%.
So what does this mean for you and your finances?
The ONS' revelation doesn't change anything in the real world. Speak to most people and they were already acutely aware that we are in the midst of an economic slump. High unemployment, high inflation, low growth, pay freezes....need I go on? But what the ONS figures do highlight is that things are not getting better in a hurry, so it's important that you take steps to recession proof your finances.
10 ways to recession proof your finances
The key is to make your finances as flexible as possible. So below I have listed a few keys thing you may want to consider until such time as the economic outlook improves
- Pay off your debt - A lot of people continue to save while they still owe money. This is a false economy, especially, in today’s low interest rate world. If you are earning 3-4% (gross) a year on your savings but are paying 17-18% on any credit card debt you are effectively paying to save money. Also by clearing your debt you remove your monthly repayment obligations which will allow you to cut back your monthly spending ASAP. See my previous article Money tip #60 – How to become debt free.
- Save an emergency fund - if possible try and save an emergency cash fund. It is often suggested that you should save at least 3-4 months salary. Then should the worst happen you will have a buffer to keep the bailiffs from the door. Read my article Build an emergency fund - the what, why and how.
- Maintain access to credit – while the aim is to pay down your debt it may be worth keeping access to a credit card to help short term cash flow issues should you lose you job and your savings run out (see the next point below). Besides even if you clear your debt having a credit card with minimal borrowing on it is good for your credit rating.
- Don't sign up to (or renew) long-term contracts or new credit agreements – the point of keeping your finances flexible is to enable you to slash your outgoings should your income drop/stop. By signing up to new credit agreements or long-term contracts you will be stuck with an obligation you won't be able to meet should you lose your job. So before you upgrade your mobile phone, for example, and sign up to a 24 month contract you may want to consider whether it is really worth it.
- Avoid taking out Payment Protection Insurance (PPI) - this may seem counter-intuitive given that PPI is designed to cover your debt repayments should you lose your job (among other things). But in all likelihood the policies will never pay out which means you will be throwing money down the drain which you could otherwise save. See my article Money tip #111 – Avoid taking out Payment Protection Insurance (PPI).
- Review your mortgage – while your emergency cash fund may be able to pay your mortgage in the short-term you may want to consider whether now is the time to take out a fixed rate mortgage particularly as some lenders are already increasing their standard variable rates. For more information see my post Should you fix your mortgage now?
- Avoid changing jobs - while a recession should not be an excuse for lack of ambition the fact remains that the last-in-first-out principle exists. So if you do decide to change jobs bear in mind the benefits you are giving up at your current company and negotiate as short a probation period as possible at your new job, as you don't want to be the victim of probation period redundancy.
- Up your game at work, network and update your CV - as I mentioned above sometimes redundancy is unavoidable but don't give your employer a reason to show you the door. Networking will help boost your profile with those people making the tough decisions higher up in your organisation. It may also pay to update your CV, then should the worst happen at least you will be in a position to act quickly in order to secure another job.
- Inflation proof your investments - if you have investments then now is the time to review them as you may have to rely on them if times get tough. Diversification is key if you want to limit the chances of your portfolio disappearing if markets head south. Have a read of this article in the Telegraph - 10 tips for investing in a recession (but ignore their recommendation to invest in structured products).