What is a recession and how can you protect yourself?

Anthony Morrow: Co-Founder

August 12, 2020

You may have heard in the news that the UK is now officially in recession as a result of the coronavirus outbreak and how it has impacted our economy since earlier this year. 

Back in May, Chancellor Rishi Sunak said the country is facing “a severe recession, the likes of which we haven't seen”[1], but admitted the “jury is out” on how much long term impact coronavirus will have in on our economy. As those of us who experienced the 2008 financial crisis and recession might remember, the economy took 5 years to recover.[2] 

I wanted to help to demystify what we really mean by a recession and how you can help to protect yourself against the possible effects. 

What is a recession?  

A recession is commonly described as a significant decline in an economy, continuing for at least six months.  For an economy to be considered ‘in decline’, there needs to be a drop in 5 key areas:  

  • Employment, 
  •  Retail sales, 
  •  Manufacturing, 
  •  Income 
  •  GDP. This stands for Gross Domestic Product and is the value of all goods and services made by a country within a specific period. GDP is usually calculated annually but can be calculated quarterly too.  

Recessions are a difficult time for both businesses and the public. With sales dropping and manufacturing slowing, businesses be forced to close or downsize which causes unemployment. Unemployment means less consumer spending and, along with a potential for the public to reduce spending due to the worry of how a recession will impact their finances, this can then fuel the recession further. 

An economic decline also has an impact on the investment markets, which can be worrying for investors. Some will withdraw their funds out of fear, and this causes a further decline in the markets. 

However, there can also be positive impacts of a recession. Prices of goods and services can lower and some businesses closing can mean more opportunity for the surviving businesses to grow sales and strengthen their position. 

For consumers, a recession can spark a change in mindset. A sudden awareness or concern over your individual financial situation can mean people spend less, save more and learn to live within their means, as opposed to relying on credit or overdrafts to get by month-to-month. 

How can you protect yourself against a recession? 

There are ways you can lessen the impact of a recession on your personal financial situation.  

Review your incomings and outgoings  

Reviewing your spending is a great first step to understanding and streamlining your finances. Some of you may already have reviewed your budget since the coronavirus outbreak due to a redundancy or changes in income. 

We’d recommend:  

  • Reviewing the past few months expenditure and create a monthly budget including mortgage/rent, bills, groceries, transport costs, spending money and savings. Understanding where every penny goes can help you identify where you’re overspending. 
  • Money management apps (like ours) can help you to understand where you’re spending your money without the hard work. Our app will continually analyse your finances and give you advice on where you can cut costs and save too! 
  • Review your bills and subscriptions to see if you can cut costs – perhaps by cancelling a streaming service you don’t use or switching energy provider. 

Avoiding using credit 
If you’re planning on taking out an overdraft or credit card for a large purchase, it might be best to hold off these plans or save up instead to avoid tying yourself into a monthly payment moving forwards. 

Save a cash buffer  

We often talk about the importance of a cash buffer for your financial security. Think of it as a cushion to fall back on should you lose your job or be put on a scheme similar to what we have seen with the furlough schemes the government have offered during coronavirus.  

As a rough guide, we recommend a cash buffer of 3 months outgoings kept in accessible savings. 

Make yourself more valuable at work  

As we know, recessions can mean redundancies and job losses. If you feel your employer would be impacted by a recession, it’s a good idea to try and protect yourself from redundancy by aiming to make yourself as valuable as possible at work. 

Taking on extra responsibilities, working overtime shifts or picking up knowledge in other specialist or business areas could make you more valuable to your employer, depending on your role and industry. 

Review your investments  

If you’re an investor, it might be a good time to review your investment portfolio. While you should be cautious of making any investment withdrawals, you may want to ensure you’re comfortable with the level of risk you’re currently taking. 

If you have a financial adviser, reach out and discuss any concerns or explore any questions you have. We think it’s really important to be able to speak to someone when you have worries, this is why we offer unlimited appointments with our financial advisers (at no extra cost) to all of our investors. 

Capital at risk

[1] telegraph.co.uk

[2] ons.gov.uk

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