One look at the news right now is enough to make your palms start sweating. Aside from the horrifying violence of war and the human cost it incurs, headlines are saturated with warnings of impending financial doom as the fallout from the Iran war adds to the pressure on Keir Starmer’s government.
The UK economy is set for a £35bn hit from the Middle East energy crisis and could enter a recession this year if the crisis drags on, one think tank has warned. Meanwhile, another alarming report has predicted that a quarter of a million people will lose their jobs by the middle of 2027, should the UK’s economy flatline. Factor in a predicted surge in interest rates and the cost of living, and the dark clouds gathering are only getting darker.
So what can you do today to prepare for more straitened times tomorrow? Rajan Lakhani is a money expert at personal finance app, Plum. Here are his tips on how to recession-proof your life.
1. Face your finances
It’s a well-documented behavioural trend that when the economy is poor, people experience financial avoidance, where they hide from their worsening finances rather than dealing with them. But this is the worst thing you can do for your financial health. Instead, do a monthly audit of your essential and non-essential payments now. There is so much support available to make managing expenses easier, whether that’s using an app to automate your payments or simply provide an overview of your finances.
2. Know your worth
Most people could do with extra cash right now. But when asking your employer for a raise, it’s important to go to them with evidence that proves that you’re being paid below the market rate. Your end-of-year review is an opportunity to discuss your pay and whether it’s commensurate with the work that you’ve been doing. But make sure that you are benchmarking against similar salaries elsewhere in the industry. An evidence-based, substantiated approach will put you in a stronger position to make the most of that discussion and, if they do push back, potentially find a compromise.
3. Think before you quit
While it can be tempting to jump ship to another company altogether when the one you’re working for won’t give you what you want, look at the long-term picture rather than the immediate (and often minimal) salary increase. You might find that your route to progression elsewhere is slower, so you don’t see that medium to longer-term benefit in your salary as well. A smaller pay increase at your current job may actually be better if there are opportunities to grow, professionally and financially.
4. Focus on your emergency fund
In 2027, the job market is predicted to endure its biggest hit since the pandemic. To allow some breathing room, aim to save between three to six months of expenses as a buffer. Don’t invest that money – it’s for emergencies, so it needs to be liquid; something that you can rely on when you need it in the short term. The Bank of England’s rate hasn’t dropped – so many savings accounts offer around 4.25 per cent – or more. So, even if the money isn’t invested, it will grow.
5. Increase your income streams
Almost one in five people across Britain now take on additional work alongside their full-time employment or make cash using “side hustles” or from a passive income. These can include selling unwanted clothes and furniture on second-hand sites like Vinted, Facebook Marketplace, Gumtree and eBay or freelance work like designing, writing or pet care to raise extra funds. Think about your skills: if you like crocheting or knitting, for example, there is a bigger premium on handmade items. Are you handy? Could you advertise yourself as a handy person? Babysitting, renting out your car, or a spare room? The smallest amounts add up. Having a second, alternative source of income to fall back on – even if it’s small – gives you some additional security.
6. Prioritise high-interest debts
While saving might feel good, there’s no point squirrelling your money away into an ISA if other high-interest debts – whether a loan or a credit card – are costing you more than you’re putting away. It’s really important to look at those high-interest items and make sure you’re paying in full to mitigate the interest. If you have a high credit score, you might be able to move your debt to a zero per cent credit card or a personal loan with a cheaper interest rate, which means you can use more of your finances to pay down the debt rather than making the minimum payment and just paying off interest.
7. Anticipate an increase in expenses
Things are going to continue to get more expensive – there’s little benefit in pretending that they’re not. So prepare for costs to increase to avoid the rug being pulled out from under you further down the line. If you’ve had a long-term mortgage that’s coming to a close, the rate at which you’re on is likely to be around double what it was previously. Try to take into account these higher costs when budgeting. Water bills are likely to increase, as are broadband and mobile phone bills.
8. Minimise household bills
New research shows that British households have, on average, paid an extra £3,400 in energy bills since the start of the surge in gas bills in late 2021. Loyalty can be costly, so it’s really important to keep on top of your financial admin and make sure that you’re not overpaying. Find the best deal possible by comparing suppliers. Energy prices are expected to increase again in July because of the Iran war, so make sure to look at all the options if your deal is nearly up.
9. If you’re already investing, don’t stop
As financial experts predict a global stock market fall, don’t panic and pull your money out of your existing investments. Instead, keep that long-term trend of feeding money into the markets going and that will smooth out some of the bumps in your investments. But this must come after reducing your debt and adding to your emergency fund.
10. Be property savvy
Bank of England figures have shown that homebuyer mortgage approvals increased in February – but that mortgage rates have been volatile ever since. When it comes to the mortgage market, it’s going to be difficult to find rates that are lower than the ones we saw in February. You can put yourself in a better position by building your credit score and not making any significant purchases.
If you already have a mortgage and it’s up for renewal, start looking at the market six months before to understand the available rates. You can always reserve a rate if you think they will go up, and then switch to a lower one nearer the time. If you’re retired and your children have left home, it might be a good time to consider downsizing as that will unlock some more money. Many pensioners have been forced to return to work or take on part-time jobs as the cost of living prices them out of retirement.
11. Keep paying into your pension
When you’re short on cash it can be tempting to stop paying into your pension but it’s never been more important to resist that urge. When you get closer to retirement, consider withdrawing the 25 per cent tax-free lump sum and keep the remaining money invested for as long as you’re comfortable. The closer you get to retiring, the more of your money becomes cash. If you’re nervous about the current economic environment, then you may want to take the cautious route and not have so much directly in the market.
12. Take one step at a time
Recession-proofing is overwhelming: it can be easy to feel like there’s nothing you can do to help yourself when money is scarce. It’s all about marginal gains. Break it down into little steps, which will add up more quickly than you realise. Set yourself a goal in the next month or two and build from there; It will give you more confidence and you will be surprised by what you can achieve. Once you’ve got that momentum, you can start flying and really taking control.
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