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Five Tips to Prepare Your Finances for a Recession

With a looming recession and a rising cost of living, people are searching for ways to prepare financially for this period of economic uncertainty.

With a looming recession and a rising cost of living, people are searching for ways to prepare financially for this period of economic uncertainty.

New data from private and commercial bank Arbuthnot Latham reveals a 926% increase in searches for “recession” in the last two months. Questions such as “how can I prepare for a recession?”, “how to save during a recession?” and “is a recession coming?” have soared across the internet with over 55.5 million people discussing the recession online.

Simon Coll, Director, Wealth Management at Arbuthnot Latham provides his top five tips for preparing your finances in advance of a recession to ensure you are in the best position possible.

1. Review your contingency fund 

An emergency fund is always important, but even more so during times of economic uncertainty. Financial experts typically recommend having six months' worth of bills and expenses saved should you find yourself in a position of needing to rely on savings. It is also important to ensure that you have easy access to this cash, and that it is not tied up in fixed-term accounts or complex investments.  

2. Reduce your debt  

Debt has been attractive to many in recent years due to continued low interest rates, however with interest rates rising, your debt is going to cost you more. 

Credit cards, store cards, and other unsecured debt typically attracts higher rates of interest than secured debt, such as a mortgage. If you have the capacity to reduce your debt, start with the highest interest rate and go from there. If you are unable to reduce the amount you owe, you may be able to transfer your debt to another provider at a lower interest rate.  

3. Make sure your money is working hard for you 

When inflation rises, keeping on top of day-to-day expenses is crucial. It is also important to consider your cashflow in the medium and long-term. For example, with interest rates rising, fixed term or notice deposits can offer better interest rates. If you have cash you might need in the medium term, but not immediately, this could provide an attractive return. Similarly, if you have excess cash and are considering opening an investment portfolio, while volatility is expected in the short-term, many experts recognise that during a recession there are often opportunities to buy ‘cheap’ assets with a view to future growth.    

Taking time to sit down with a professional wealth planner to review your short-, medium-, and long-term plans is important if you want to develop a coherent strategy. A professional adviser can help you navigate the emotions associated with uncertainty and focus on your goals and aspirations. while taking full account of your circumstances. For many, this human touch remains incredibly valuable. 

4. Review your investment portfolio 

Do not let the headlines scare you into selling your investments. While watching the value of your investments fall is hard, investments should always be made with longer-term returns in mind, and we always advise clients not to be swayed by short- term market volatility. The chances are that if your long-term objective remains unchanged, so too should your investment strategy. However, if you are uncertain or your personal circumstances have changed, your investment manager can discuss your options. 

Liquidating an equity portfolio during a period of reduced valuations crystallises any losses and may miss the upside as markets adjust. While you will no doubt experience short-term fluctuations, your investment managers should be looking for opportunities which present potential long-term value. Diversification is the key to balancing your risk so you can expect a professional investment manager to suggest balancing different asset classes. 

5. Prepare for things to get better 

Remember, every previous recession has eventually ended and been followed by a period of economic growth. There is no reason to think this dynamic will not continue. 

Having a longer-term focus can help you prepare for bumps in the road and prepare you to emerge on the other side in a healthier financial position that you might otherwise have been in. A wealth planner can help you define your goals, establish how realistic they are in terms of your personal circumstances, consider any economic uncertainty, then guide your investment decisions in a way that matches your objectives, giving you peace of mind that come from knowing you are on the right path.

 

Speak to a member of our Wealth Management team to find out how you can prepare your finances in advance.

Author -

Simon Coll, Director, Wealth Management

Simon Coll

Director, Wealth Management

Find out more about our Wealth Management team.