It’s difficult to ignore that the economy isn’t looking too good at the minute – all the numbers are currently pointing towards us heading into an economic slowdown.
It seems that we’re already in the early stages of a recession, even if, by definition, we’re not actually there yet (a recession is when there are two consecutive quarters of negative economic growth).
Now, a recession isn’t a once-in-a-lifetime occurrence and we shouldn’t be shocked that one is going to happen. On average, people go through eight recessions/economic slowdowns in their lives, so they’re fairly common. But every recession is different, so the best way to prepare and the considerations that have to be made are different every time.
Here’s a bit of an insight into what’s going on, with some suggestions to help you prepare your finances and protect your financial wellbeing.
What’s been going on, then? 🤔
Inflation has been going up in many parts of the world over the past few months. In the UK, it’s been steadily rising since February 2021, but especially quickly since September 2021 (see this graph).
Stock markets have been tumbling in response to inflation surges – for example, the Nasdaq-100, an index of 100 of the largest non-financial US companies, dropped 13.8% between 25 April and 24th May – and there are growing alarms ringing that persistent inflation could tumble us into a recession.
This will be the fourth recession of this century and will again be different to the previous events:
In 2000: the dot-com crash, caused by the irrational exuberance that formed around internet startups;
In 2008: the “financial crisis” where a global economic meltdown was triggered by the collapse of the U.S. housing bubble;
And of course, in 2020: Covid caused a global shutdown that took the whole world into recession within 7 months.
The current situation has likely been caused by many factors. But it’s fair to assume that the printing of vast amounts of money – the US government printed a crazy $5.2 trillion in Covid relief and in the UK, £413bn was printed between March 2020 and July 2021 alone – was the catalyst compounding the challenges of Covid and the ‘post-Covid’ period.
Initiatives such as furlough may have saved the UK from a recession in the middle of a pandemic, but mountains of money cause inflation in the end.
During the lockdowns, people couldn’t spend the money as they usually would: services (cinema, travel, eating out) were closed and more money was spent on goods (food, exercise equipment and furniture). Too much of that money also found its way into the stock market (remember the meme stock craze?).
What can I do to prepare my finances and deal with the situation?
Check your budget and shop around
Inflation has hit a 40-year high at 9%. And it only seems to be going in one direction – many expect inflation to reach 10-12% before it starts falling again.
A great first step is always to sort out your budget and work out how much you’ve got coming in and going out. Our budget calculator can help you do this.
Then, think about shopping around a bit so you can spend less. There isn’t much choice in electricity providers at the moment but food, transport and consumables still provide options to save a bit of money.
Look for cheaper options for your debt
Interest rates are going to continue rising to try to counter inflation, especially as they’re currently at very low levels. This sucks money out of the system as consumers spend more to pay off their debt and less on everything else.
If you have any debt, it’s a good time to move it onto cheaper options (ones that charge less interest e.g. 0% credit cards or an interest-free overdraft, rather than high-interest credit cards).
Make your debt as cheap as possible to minimise the impact of the interest rate increases. To understand why just paying the minimum monthly repayment on an interest-charging credit card isn’t enough, read this blog.
If you’re considering using Buy Now Pay Later (or have already used it), it’s a good idea to make sure you understand how it actually works and what you need to be aware of. Here’s a free guide to help.
People in the UK owe a huge amount of money – they owed £1.7 trillion at the end of 2021 and borrowers paid £124 million per day in interest alone! 🤯 This means it won’t be easy for the Governor of the Bank of England (whose in charge of changing interest rates) to do so without crashing the economy.
Think about any investments you have
Because of uncertainty, there’s been a widespread sell-off of stocks, with $7 trillion of value wiped out across the US.
Meanwhile, the FTSE, the main UK stock exchange, has been steady – though unexciting – but we’re keeping a close eye across the pond as what happens in the US almost always comes here.
Take stock of any investments you have (including if you have a pension pot) but think twice (and a couple more times) before realising any losses (selling at a loss). Historically, markets do recover; the long term trend is upwards and so for many, the best thing to do right now is nothing.
Crypto might not be right for you
The crypto market was worth almost $3 trillion at its peak and has lost over 10% of its value (>$300bn) since the panic began. At the start of May 2022, crypto markets lost $600 billion in just one week. Bitcoin is now worth less than half of what it was in November 2021.
As with all investments; think twice before doing anything and don’t fool yourself about ‘buying the dip’ – we’re likely not there yet. Make sure – if you are considering or have already invested in crypto – you fully understand what you’re (getting) involved with.
Look into ways of making more money
There’s only so much you can reduce your spending – you have to eat and pay to live, after all! So it’s worth also trying to get your hands on more money.
Apply for additional funding
If there’s free money on offer that you can apply for – do it!
If you’re currently studying, your institution is likely to have some additional funding sources available that you might be eligible for. Reach out to the finance or funding teams to learn what’s on offer.
On top of this, there are tens of millions of pounds of scholarships and bursaries available for students from external providers. The Scholarship Hub is a good place to start.
Invest in your financial education
The rest of this year will be dominated by the fallout from the pandemic and a key way to navigate these next 12-18 months is through education.