Personal Finance

[Coronavirus Update] - How to prepare for a recession

We have added a section at the end of the article on how to damage control the impact of the Coronavirus on your finances.

Preparing for a recession? You’re not alone. Brexit and other geopolitical events like Coronavirus have many people preparing to tighten their belts.

Although analysts continue to debate the likelihood of a recession in the UK in the near future, it’s better to be safe than sorry, as the saying goes, so if you’re looking to secure your financial situation ahead of an economic downturn, consider this your starting point.

How to recession proof your finances

1. Budget and reduce expenses to live below your means

Even during stable markets it’s wise to live and spend below your means. That way you can build up an emergency fund, invest in assets, and generally prepare yourself for any unexpected life events. Even millionaires do this to accumulate and build wealth. If you expect to be hit by a recession, that’s all the more reason to evaluate the costs of your lifestyle. Money Dashboard can help you do this by pulling together your spending history and making a budget and savings plan.

2. Pay off your debt

Your debt collectors are not going to care that there is a recession and money is tight. If anything it can make them more determined to get what’s owed. So if you want the best possible personal finances in a recession, try to pay off, or mostly pay off any debts as quickly as possible. Money Dashboard can also help you evaluate every month how much money you can allocate to repay your debts earlier.

3. Have your emergency fund ready

You never know. And you should always prepare for the unknown. To best protect your finances in a recession try to build up an emergency fund that can help you get out of hot water when an expensive event occurs, like job loss and sudden home or car repair. A best practice is to open a separate savings account—preferably one with a high interest rate and no penalties or restrictions on withdrawals at a moment’s notice—and start funnelling small amounts into it every month, and whenever spare cash is on hand.

4. Build up your credit score

Like it or not, your credit score matters a great deal. And a good credit score opens all kinds of doors to better deals and opportunities to borrow money, if necessary, at lower interest rates and lower penalties. The method by which scores are calculated may not always seem sensible, but if you want to build up a score you have to play by the rules. One of the best ways to boost your credit score is to get a credit card and keep the balance low, and pay it off regularly. Another best practice is to pay all bills on time in full. If you don’t know your credit score, you can check it for free with services including ClearScore and Credit Karma.

5. Diversify your portfolio

Looking for how to recession proof your portfolio? A properly diversified portfolio can help you prepare for a recession and smooth out the returns on your investments. That means spreading your money across a variety of asset classes, industries and geographical locations. By diversifying, you limit your plan’s negative exposure to any single event. Although past performance is no guarantee of future performance, if you are looking for assets that are recession proof, consider that gold, government bonds, and cash, have been historically recession proof. Utilities and some consumer staples stocks can also potentially resist a bad economy.

6. Start an opportunity fund for your investment portfolio

When it comes to investment markets, what goes down often goes back up. Back in 2008, many people withdrew 100% of their investments from the stock market in fear that the recession would be unrecoverable. They were wrong. It’s helpful to remember that historically, markets go up in the long term (usually more than 10 years). Those who panic and take out money in a period of recession or high volatility risk missing out on any recovery and future gains. What’s more, everything may become a value stock during a recession so be ready to buy when stock plunge.

Source: MacroTrends. 90 year historical chart showing the S&P 500 stock market index. Historical data is inflation-adjusted using the headline consumer price index (CPI) and each data point represents the month-end closing value. Shaded areas represent periods of market recession. Remember that past performance isn’t a guide to future performance.

7. Evaluate your work situation

Look, not every job is sustainable in market recessions. People and businesses alike are bound to cut their costs, and any non-essential costs are first to go. So take a moment to consider if your job and skill set it unessential in hard times. If not, great. If yes, you may want to start expanding your skill set, build your network and think about moving jobs. Free online academies and LinkedIn can help you there.  You may also want to consider starting a side hustle, from crafts to home repair to delivery work to bring home additional income.

Bonus: Survival tips from the Great Depression

When thinking about how to survive a recession, we are often reminded of the Great Depression in the 1930s. It’s unlikely that a modern market crash will be as dire. But there are some helpful money saving tips to pull from their experiences.

Beyond the essential “be frugal” and “stay out of debt” lessons described above, here are some helpful tips from ThreeThriftyGuys for how to prepare for the next great depression:

* Reuse, Reduce and Recycle. Remember those three Rs? They sure didn’t.

* Grow and pick your own food – Why spend money when you can put a patch of land to work growing nutritious fruits and veggies? If you don’t have a garden fit for planting, consider an allotment. And forage for seasonal herbs, berries and leafy greens whenever you can.

* Preserve your food – Respect your food, and preserve any excess that you’re lucky enough to have. Jar and can it for when it’s most needed.

* Multiple sources of income – Side jobs often helped people make ends meet in tough times.

Use these tips to financially prepare for a recession and you should be in a much better position to whether any hard times ahead.

How to damage control the impact of the Coronavirus on your finances

The impact of the Coronavirus is unprecedented and will totally disrupt the global economy and a lot of aspects of our daily life. At the time of writing, on the 16th of March, it is too early to comprehend exactly how the United Kingdom will be impacted but you can already take actions to try to mitigate the impact of the Coronavirus on your finances, especially in case of recession.

Given the magnitude of the crisis, Governments and Central Banks may take measures that we can't imagine and while it is better not to count on them they may provide a lifeline for a large number of people.

In the points below, we try to suggest some potential actions covering the main personal finance areas directly impacted by the Coronavirus.

Is my money safe with my bank during the Coronavirus?

For all the financial products you have, including your current account with your bank, you need to check if they are covered by the Financial Services Compensation Scheme (FSCS). Under the FSCS scheme, a bank account is currently covered (as of March 2020) up to £85,000 per eligible person, per bank, building society or credit union and up to £170,000 for joint accounts.

It means that if your bank account is protected by the FSCS, like most main street banks and some (but not all) neobanks, the bank can go bust and you would be automatically compensated up to £85,000, £170,000 or £1 million depending on the circumstances. You should visit the FSCS website for all the information-  this is the main source you should trust on this topic. The Financial Conduct Authority is also providing updates about the Coronavirus (including on Scam, access to cash and insurances).

What if my bank or the financial products I use are not covered by the FSCS?

You should consider your personal situation, if the majority of your money is with financial providers not covered by FSCS you should probably consider transferring at least most of them (or all of them if you want to be sure to be protected) to financial providers and banks covered by the FSCS.

The impact of the stock market crash on my Share ISA

Stock markets around the world are declining at a rate not seen since the financial crisis of 2008/2009. If you have shares, ETFs, funds or bonds in a Share ISA , the best course of action is probably to talk to your trusted financial planner before taking any actions. Trying to time the market and rebalancing by selling or buying could lead to huge financial losses in your portfolio and it is incredibly perilous in the current situation even for experienced traders.

The impact of the stock market crash on my Pension

An amount of your pension will be invested in the stock market and potentially declining with the Coronavirus. But the impact depends on your personal situation and the percentage of your percentage portfolio allocated to equities versus bonds. Again, talking to a certified professional before taking any actions is required.

A lot of the default funds in the automatic enrolment pensions tend to automatically re-balance the closer you are getting to your retirement age but you need to verify that. 

In this case, if you are young, the vast majority of your pension is invested in shares but there is a high probability that you can recover current losses in the following decades. 

If you are only a few years away from retirement, a lot of pension funds would have sold the majority of your shares (likely retaining 30% or less of your portfolio in equity) and move the vast majority of your pension to safer assets like cash or government bonds. You may experience some losses but probably smaller. To reiterate, these scenarios depend on your pension fund portfolio and you should analyse it on a case by case basis with a trusted professional.

Interest rates and saving accounts (including Cash ISA)

It is very likely that interest rates globally will move to a very low level (0%), including in the UK. It will translate into very low interest rates for saving accounts and Cash ISA. Make sure that the accounts you have are protected by the FSCS and consider them as a "safe parking spot for your money" rather than a source of income and financial gains.

Interest rates, loans and credit cards

With the decline of the interest rate, getting a loan or a credit card could get cheaper but also more difficult if you have a bad credit score. Compare the offers and transfer your balance to a new provider when appropriate. Again, it depends on your situation and you need to evaluate all the parameters first.

What about the property market? Is the value of my house declining because of the Coronavirus?

As of March 2020, it is too early to know the full impact of the Coronavirus on the house prices in the UK.

The limitation of physical contact will very likely reduce the number of properties available on the market in the coming weeks and months and the appetite from buyers. You also have a lack of financing available because banks are scrapping their mortgages deals according to the BBC.

What about my mortgage? If I can’t pay it anymore.

‍Some banks are giving a break on the payment of your mortgage. It is a delay and not a reduction of your mortgage and you need to negotiate with your bank directly to get the best proposal under the current situation.

What if I can't pay my rent because of the Coronavirus?

‍Shelter can give specific advice to everything related to renting in the UK including about your rights or benefits you can get.

Where can I find more advice?

Citizens Advice has more than 21,000 advisers which can cover a lot of the topics impacted by the Coronavirus, from debt to housing.

What can I do to get my finances under control during the Coronavirus?

The Coronavirus in the UK is an unprecedented situation. It is impossible to predict the impact on your finances and how support available from the government may or may not evolve during this outbreak. 

Thinking in terms of the worst case scenario could help you to be very methodical in your approach and to make sure that you are taking the most appropriate decision for the well being of your budget.

You could use the hypothesis that your income will go to £0 tomorrow for a period of 2 to 3 months. What would happen?

  1. What is your minimum monthly budget for your household? 
  2. Would your monthly budget survive the Coronavirus with the lowest unemployment amount of benefits you are eligible to receive?
  3. Act now and immediately if you are scared by this possibility
  4. Follow the news development on the Coronavirus from independent reliable sources such as BBC news, not social media or your friends and relatives. Use your critical thinking and ask for the source every single time. The Government, banks, public and private sector may launch initiatives or temporary aids that you could benefit from and you want to follow the appropriate process to get them.  
  5. Start a budget if you are not doing that already and review every single expense and consider if you should continue spending money on this thing. Money Dashboard fully automates the categorisation of every transaction to help you to save time on this front. You will see straight away how you are spending your money.
  6. Keep your monthly expenses to a minimum.
  7. Be ruthless and creative, do you need to pay a subscription for unlimited music when you can have free music with ads on Spotify or YouTube. No you don't!!!! Just go for free as much as possible. Before buying anything, invest the time to Google it, read reviews, compare and find free alternatives before making a decision!
  8. Consider any additional sources of income you can do exclusively online and not involving sending physical goods. Freelancing, tutoring online or doing online tasks could supplement your main income during this temporary crisis. Sites like Fiverr or Amazon Mechanical Turk are potential places to start working for.
  9. Review your insurances, especially Life Insurance subscribe to one immediately after comparing prices and Terms and Conditions if you have people depending on you. Read the terms and conditions of your critical illnesses policy because some of them do not cover you if you lose your job.
  10. Reduce your investment risks. Except if you have money you can be 100% comfortable entirely losing and still survive without income until the end of 2020 do not make investment decisions without consulting with a Certified Financial Planner first.

Sit strong and be calm, as we saw with the Coronavirus in China the spread of the Coronavirus can stabilise and life will restart slowly.

All content is for informational purposes only and is the opinion of the author. Nothing on this website should be interpreted as "advice".

Money Dashboard Ltd make no representations as to the accuracy, completeness, suitability or validity of any information on this site and will not be liable for any errors or omissions or any damages arising from its display or use.

Jonathan Sepulchre

Senior Growth Manager