Alarming figures from the other side of the world suggest another recession could be on its way.
The dark days of late 2008 seem like only yesterday, when cameras followed tight faced ex-employees hauling cardboard boxes out of Lehman Brothers buildings around the world and anyone with an account at Northern Rock took the day off work to try to get their money out.
Recovery from the global financial crisis has been gradual and wage growth has only just broken the surface, but now analysts warn the next slowdown is fast approaching .
One thing is for sure – those who were burned by the knock-on effects of the last boom and bust cycle won’t want to repeat the experience any time soon.
“Understand what you are paying for and why,” advises Anthony Morrow, co-founder of evestor.co.uk. “Keep a careful budget and get into a routine of putting away any disposable income to build cash savings.
“Ideally you would have three months’ salary saved away. It may seem daunting now, but start small and gradually increase the amount by a couple of pounds each week. You will be amazed how quickly you feel more secure.
“The average household has £15,000 of unsecured debt, excluding their mortgage. Manage your debt responsibly and give yourself a repayment plan. Cut up your credit and store cards, and pay off any personal loans. Getting the balance paid off will provide a sense of relief, not to mention the saving you will make on interest payments.
“Keep track of your expenditures and monitor what you’re paying each month. Look at your credit cards and utility bills – could you be getting a better deal elsewhere? Don’t be afraid to switch accounts, compare providers and make sure you are getting the best deal available.”
“The first thing consumers should do is look at their outgoings and think about how they can minimise them, particularly those that are fixed,” says Ishaan Malhi, chief executive and founder of online mortgage broker Trussle.
“The largest and most obvious expense for most homeowners is their mortgage; being proactive when it comes to managing your mortgage could put yourself in a much stronger financial position, should there be another recession.
“Homeowners should begin by thinking about whether they’re on the best mortgage rate they can be on. Rates are extremely low at the moment so locking in a good deal with low interest payments could provide much needed stability should we see a financial downturn.”
If you have a savings buffer, overpaying on your mortgage when possible could also put you in a stronger position should a recession strike. This will lower the loan balance and reduce the chance of falling into negative equity should the recession drag house prices down. Bear in mind that most lenders have a limit to the amount you can overpay by each year.
Work and insurance
“People who are worried about a recession can take out unemployment cover,” says Emma Thomson, head of customer care at protection adviser LifeSearch. “However, be aware that the unemployment cover element will usually only pay out for a year and if you’re self-employed you will most likely have to fold your business to claim on it. If you are worried, the sooner you act, the better.”
“Don’t lose out from storing your hard earned money ‘under the mattress’, or you can be sure inflation will erode those savings away,” Chris Atkinson, head of consumer distribution at Zurich, says.
“Make sure to shop around to get the best outcome for you. There are many saving accounts and products on the market, which pay above-inflation returns, so make sure you look around to get the best deal.”
If and when the markets take a nosedive, don’t panic, don’t withdraw your money, and don’t try to time the markets warns Jamie Smith Thompson, managing director of pension advice specialist Portafina.
“Any investment timeline is littered with dips and spikes, but over time, history shows the investment will continue to grow. Investor discipline is all about riding the storm. If you have an investment period of five years, you should be able to come out of it the other side with the market recovered and positive growth on your savings.”
Meanwhile, diversification is key. “The key to riding out a recession is to ensure you diversify your assets and that your savings and investments are equally spread out,” Atkinson adds. “Only put what you can afford to lose in high-risk areas, and this way you can offset any potential losses over the long-term.”
He urges investors to carry out an investment portfolio health-check.
“It may have performed well originally, but it’s important not to become complacent and assume it is doing all the work. To protect against future stock market shocks, hold a mix of cash, fixed interest and shares spread across global markets.”
Gareth Rees, a chartered wealth manager at Gem & Co Financial Services, adds: “Many [investors] we meet have portfolios that are overexposed to the UK stock market.
“The UK represents only 6 per cent of global stock markets yet we often see 50 per cent or more invested in the UK stock market, which is known as home bias. Concentration levels such as this will compound potential losses in that market should it experience a downturn. It’s much better to have a market weighted, globally diversified portfolio to protect you as it’s much less likely everywhere will be in recession at once.”
“When we think about economic downturns, we tend to think about the impact on workers but the retired population are affected too. Historically, those who had bought an annuity had a fixed income, providing some security against recession, but with an increasing number of retirees opting for flexible drawdown the performance of the stock market is now a much bigger consideration,” says Steven Cameron, pensions director at Aegon UK.
“There are options for those in retirement looking to protect themselves against market fluctuations and relatively new solutions like drawdown with guarantees now allow retirees to remain invested in the stock market, while also giving the added security of a guaranteed income for life and access to some or all of their capital if it’s really needed.
“For those that choose the flexibility of drawdown, and remain invested in the financial markets in hope for long term gain, it’s vital to make use of the expertise of a financial adviser to benefit from the upsides as well as to help prepare for any storms on the horizon.
“A pension can play a key role in protecting you financially in times of uncertainty and advisers can play a big part in helping chose the best product, and then use it in the best way, for you and your family.”
Rees adds: “It is important to remember that economies run through cycles and a recession is a natural part of that cycle, just as we expect the seasons change.
“Reviewing your own goals-based financial plan is a really useful way to prepare for all weathers. The journey ahead may become turbulent but with proper planning you will be best placed to ride it out.”