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Recession-proof your finances: why it’s time to assess your ‘lifestyle creep’

Paloma Kubiak
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Paloma Kubiak

With concerns coronavirus will drag the UK into a recession, Brits are naturally looking at ways to shield their finances and cut any unnecessary costs.

Early signs point to the UK heading to a recession as unemployment looks to rise, businesses are set to fail and consumer demand will drop.

The last recession saw personal debt rise and a crunch on earnings. It took five years for the UK economy to get back to the level seen before the financial crisis.

And given the current coronavirus pandemic, households are tightening their belts and are looking to recession-proof their finances.

Laura Suter, personal finance analyst at investment platform AJ Bell, shares five top tips to help prepare your finances to be as recession-proof as possible:

1) Address your debts

Focus on using any spare cash to pay down expensive debt you have, such as credit cards or loans. Find the debt with the highest interest rate and start paying that off first, before moving to the next highest rate.

However, many people won’t be in a position where they have spare cash to be able to funnel into paying off debt. Interest rates are at record lows, which means the cost of debt has fallen slightly too.

Those with better credit records will find they have more options, and moving your debt to a 0% credit card or a personal loan on a cheaper interest rate could be a good option, and means you can use more of your capital to pay down the actual debt rather than just paying off the interest.

If your finances are already affected by coronavirus there is help from the bank, from interest-free overdrafts to payment holidays on loans and credit cards. But with payment holidays, you will still pay the interest so it can cost you more in the long-term.

2) Build up an emergency pot

Try to build up an emergency pot of cash to fall back on should you lose your job, see your income cut or face any unexpected costs. One in eight adults have no savings at all and 45% of the population have less than £2,000 in cash, showing how financially exposed many people are.

It’s a good idea to build up between three and six months’ of outgoings, so tot up your mortgage or rent, bills, and essentials and work out how much you need. If this seems like a high figure then just put away anything you can. This money should be available immediately, so put it in an easy-access cash account rather than one where access to the money is restricted. But find the one that’s paying the highest rate of interest – at the moment this is about 1.3%.

3) Take the red pen to your outgoings

You could use your new-found spare time to check you’re paying the cheapest price for all your services.

Start with the big things, such as making sure you’re on a competitive mortgage rate, which can save you hundreds of pounds each month. If you’re worried about losing your job in the future then you might want to extend the term of your mortgage so your monthly repayments are lower. This will cost you more in the long run though, as you’ll be paying interest on the debt for longer.

If you’re on your lender’s standard variable rate (or SVR) then you’ll be paying far higher interest than new deals would offer. You need to look at the available equity you have in your home and whether your income is sufficient to be eligible for a new deal. Mortgage lenders have pulled many products, so you might not have as many options as you would have previously. Speaking to a broker could be a good starting point.

Next look at unwanted direct debits or bills that have crept up in price. There’s lots you can do just by going on a comparison website and hunting for a new deal.

4) Cut lifestyle creep

Aside from the bills you pay each month, now is a good time to look at what you spend each month on ‘non-essentials’. Clearly the past month isn’t going to be indicative, but look back at the previous few months’ bank statements and work out where you’re spending your money.

As people gradually earn more, they gradually spend more on their everyday lives, whether that’s buying slightly nicer clothes, going to better restaurants or on pricier holidays. It’s so small that we often don’t notice it, hence the term ‘lifestyle creep’. There’s nothing wrong with this as long as you’re living within your means, but it’s a good idea to pinpoint areas where you can easily cut back and save money, should you need to.

5) Work on a side-hustle

Some of us may find ourselves with more spare time, so it could be a good chance to turn your hobby into something that could generate an extra income or to learn a new skill that could turn into a new line of work or a second income.

If you’re worried about job security it could be good to have an alternative source of income to fall back on, even if it’s only small to start with. Failing that, you could use it as a chance to de-clutter your house and earmark stuff that you’re not using anymore that could be sold to generate money.