Secure Your Money During a Recession

According to the Bank of England’s latest projections, the British economy is experiencing a shallow recession in the first quarter of 2023. Unfortunately, this downtrend is expected to last for about five quarters. There are high energy prices, and the increasing interest rates restrict spending. We already wrote about this in the article UK Economic Outlook for 2023. 

In this blog post, our experts assembled some tips to help you to recession-proof your finances.

Keep Your Money Safe During a Recession

A recession refers to a sharp and long-term decline in overall economic activity. When it comes, prices rise, incomes fall, jobs are cut, and in general, the population of the country and the business sector do not feel confident.

There’s a variety of everyday habits that individuals can adopt to safeguard themselves against the negative impacts of a recession or even mitigate them entirely. As the recession hits, you can use our tips and maintain your financial stability.

1. Living Within Your Means

During good times, having debt doesn’t pose a problem, especially if you can easily manage your monthly repayments. But, in a recession, the risk of job loss increases, and if you are unemployed, making regular repayments may become a problem. It is beneficial to consolidate all your card debts onto one credit card with an interest-free period of up to 34 months. Additionally, if you are married and have a two-income household, consider trying to live off one spouse’s income as much as possible.

To prevent falling into debt when hard times come, you can make a habit of sticking to your budget and living within your means. Thus, when faced with high prices for necessities like gas and food, you’ll easily adjust your spending in other areas. Debt can quickly spiral out of control, so stay attentive.

2. Reduce Your Outgoings

During the cost-of-living crisis, many families feel like they’re in a tight spot. If you can relate, take a good hard look at your finances to see where you can cut costs. Even small expenses like buying a £3.50 coffee on a regular basis can really add up to a lot over time. 

You might be surprised by how much you could save each month or even year if you attentively manage your expenses and write down what you earn and spend. Additionally, there are many great budgeting apps that help monitor your finances more effectively. Reducing your expenses is a reasonable way to go during a recession.

3. Find an Additional Source of Income 

Often, students and homemakers work part-time, and for those who have settled in their careers, it is customary to have a permanent full-time job, but this doesn’t always hold true. When a crisis strikes, this is often not the case at all. Perhaps right now, it is worth looking at how you can earn extra money, particularly if you are concerned about the possibility of layoffs at your current job. Diversify your activities and explore multiple ways of earning money to secure yourself in case one source of income dries up. 

During an economic downturn, avoid being blindly complacent about your work. If you quit your job when other companies are not hiring, it might be challenging to find a new position. Fortunately, at the moment, there is a record number of jobs available. So, if you plan to switch careers, you might want to do so sooner rather than later.

4. Think About Your Retirement

It’s okay to change your attitude towards finances in times of economic uncertainty, especially when retirement seems far away and you need your savings now. However, you should resist the temptation to cut your pension contributions, although this might seem like a quick fix. 

Reducing your pension payments could have significant long-term consequences. According to a study conducted by wealth manager True Potential, a 25-year-old who decreases their pension contributions by just 2% could potentially lose out on £60,000 over a lifetime.

If you have already reduced your payments, start topping up your pension again as soon as you can. You can make small sacrifices in other areas of your monthly spending to free up some funds. Also, if you’re unsure about how pensions work or what the best way to manage your retirement funds is, ask a financial advisor or read online guides.

5. Avoid Impulsive Decisions

Do not make hasty financial decisions, and avoid impulsive spending during a recession. While it may be tempting to splurge on expensive goods for instant gratification, it can later lead to regrets if your savings come to nought.

Instead, think logically and avoid taking big risks. You could even delay significant financial decisions to focus on putting yourself in a more secure position. Then you’ll have room for manoeuvre if times get even tougher. Rather than making impulsive purchases, take the time to assess your current financial situation.

Recession Worries: Is My Money Safe Now?

Many people are worried about the safety of their money in a bank during a recession. This is a legitimate concern that should be discussed. The safety of your money depends on several factors – the bank you use, the country you’re in, and the currency you hold. 

The most impactful risks for you include:

• Bank risk: Is my bank safe?
• Country risk: Are there risks connected to my country, exchange controls, or laws? 
• Currency risk: Are the currencies I hold stable reserve currencies or not?

We will explain the bank risk factor below and offer steps you can take to ensure the safety of your assets.

Is My Bank Safe?

The bank you choose is, of course, the dominant and quite obvious criterion in determining money safety. Let’s see what specific signs to look for to ensure that you work with a secure institution with strong financials that won’t collapse during the next crisis. 

The good news is that all you need to assess related risks is publicly available. You just need to know where to look and how to interpret the figures. Consider the following financial variables: the bank’s solvency and liquidity. 

• Solvency means that the bank has enough funds to cover depositors and creditors if some of the bank’s assets go bad. You can calculate a solvency ratio by dividing its total equity by total assets. A solvency ratio of at least 10% is desirable.
• Liquidity reflects the amount of depositor money that the bank holds in cash and other liquid investments, which is important in withstanding any significant withdrawal demands. We recommend having at least 10% of all deposits kept in cash and cash equivalents.

In the UK, the government guarantees savings of up to 85,000 GBP if the bank defaults. As long as you don’t have more than that held with one bank, your money is safe.

So, analyse your bank carefully and check whether it meets your safety requirements. Depending on your current risk exposure, you can consider opening new accounts to spread your funds across several institutions or jurisdictions, reducing your overall risk. 

Keep Your Money Safe with Payrow

The core principles of keeping money safe during a recession are similar to those at any time in the economic cycle: follow the news, read trusted financial channels, and consult your accountant if any economic issues occur in your country. 

But if you wonder how to make your business funds even more secure, consider working with Payrow. Payrow is a UK-based company that helps digital startups and small and medium-sized businesses grow and develop. Our goal is to increase the level of fintech adoption by implementing the latest technologies and making finance more accessible and easier to manage.

Using Payrow services, you can significantly improve your business strategy by reducing costs and automating bureaucratic processes. We provide services that enable you to free up valuable time and concentrate on key business objectives. Our team of professionals offers customer support throughout the entire business cycle. Boost your business with Payrow!

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