Your four step recession survival guide

What you’ll learn:

• How a cash cushion can help take the strain in a recession.
• Why it can pay for investors not to sell in a panic.
• The wisdom of taking a diversified approach to your investments.

Recessions are an unwelcome fact of economic life – and when they hit, they risk knocking your financial plans off course. The country officially tumbles into recession when there are two quarters of decline in GDP in a row. In other words, when the value of goods and services produced falls over those periods. The usual result is job losses, less tax collected by the government, consumers spending less, company profits declining and investors feeling the squeeze on dividends received – if any. This all seems a bit bleak. But if you plan ahead and are smart with your saving, investing – and economising – regime, you should hopefully be able to ride out the worst of the storm.

Here are four ways to recession proof your finances:

1: Take control of debts

Fix the roof when the sun shines may be a cliché but if you attend to your debts before disaster strikes you can help reduce the financial fallout. While you still have spare cash, consider using it to rid yourself of – or at least reduce – expensive loans, such as credit card debts. If that’s too difficult, or it’s too late and you’re already feeling the pinch from the recession, consider switching to cheaper debt, such as a zero per cent credit card so you can tackle repaying a loan without paying interest on top. If you are accepted for a zero per cent card, there is a cost involved in switching your balance of perhaps 3 per cent but if you manage the repayments wisely and pay off the loan by the end of the zero interest period it could help cut your costs. Some cards also offer zero per cent interest on new spending.

2: Develop a thrift habit and build a cash fund

You might think you can’t possibly economise. But as you may have discovered during the coronavirus lockdown – if you were still in work – savings on commuting costs and daily lunches alone soon mounted up. Give up certain impulsive purchases, weed out unwanted direct debits, discover the allure of no-frills supermarkets and switch to cheaper energy and broadband deals and you could see savings grow even faster. Check you are not paying too much for your mortgage – and, if appropriate consider moving it to reduce your repayments. If you are unsure, seek professional advice. At the same time, boost your income from other sources. Why not develop an eBay bug and sell all those unwanted items clogging up your home? You could look into renting out a spare room in your house – or even storage space.

For many people, a recession is the rainy day that you’ve constantly been warned to get ready for. If you end up out of work or your salary is reduced, and you’ve done all the economising you can, you’ll need to find money from somewhere to support your lifestyle. Although you may qualify for certain state benefits, your most prudent move could be to build your own individual ‘welfare state’. How much you put aside in your emergency cash fund is a personal decision and will depend on your circumstances and what you can afford. Get started setting up a direct debit into an easy access savings account paying the best interest you can find. When you feel you have an adequate cash safety net it can give you the confidence to consider venturing into investing.

3: Don’t panic when stock markets wobble

Recessions tend to cause stock markets to wobble because confidence in certain companies and their profit potential falls. But if you are already putting money into a pension or stocks and shares, try to keep the habit going if you can afford to. A break in saving now will make it harder to get your financial plans back on track later. Try to remind yourself why you started investing in the first place and keep your focus on the goals ahead. But most of all resist dipping into investments to meet everyday bills. This is why a cash fund is so valuable as a source of emergency money. If you cash in investments when markets are falling you risk losing part of the gains you might have made to date – or worse still – selling at a loss, making it even trickier to catch up with your financial goals. Stock markets have tended in the past to recover eventually, although no-one can be sure how quickly or slowly that will happen or if it will; past performance of investment is not a reliable to guide to its future performance. That’s why investing should always be for the long term – at least five to 10 years – to give you more time and therefore more chance to recover from market shocks.

4: Give your investments a wealth check

When stock markets are unsteady, rather than sell up in a panic, channel your energy into checking whether your existing investments are positioned sensibly to ride out the recession. It’s a good opportunity to assess whether your investments are well diversified and balanced. For example, if your investments are all in the UK market, that might be too concentrated – though remember many of the biggest UK companies earn a lot of their profits from other countries. It can make sense when adding to investments to consider other global markets as well as different assets such as bonds so when one market or asset goes through difficulties another will hopefully do better, balancing the risk.

Choosing funds as your way to invest can help achieve instant diversification as fund managers pick a wide range of companies on your behalf and will often invest across different assets and countries, depending on the funds you opt for. Remember that recessions often put company dividends under pressure and companies may cut or even pass on paying them altogether. If you depend on dividends to top up your income, be prepared to see that income drop as some companies won’t pay any dividends during hard times. A possible alternative for income-seekers is an income investment trust. This is a type of stock market listed fund that is permitted to hold back a proportion of the money made in the good times to ensure a dividend can be paid out of reserves in more difficult periods. There is no guarantee they will pay a dividend in a recession but many income investment trusts pride themselves on their long-standing records of paying out dividends, whatever the weather, albeit that you have to bear in mind that this too is to some extent past performance of these investments and therefore not a reliable indicator of what they might do in the future. When considering an investment trust, remember its share price tells you what investors believe the investment trust is worth and does not represent the actual net value of the assets it holds. If the share price is at a premium (higher than the value of the assets held) that means that investment trust is in demand. If the share price is as discount (valued at less than the assets held), it means investors aren’t so keen.

Consider Ready-made investments

If you are unsure about how to best diversify your investments, you could take a look at Barclays Ready-made investments. These are five different investment portfolios designed to match different levels of risk and reward. The funds are managed by Barclays’ investment experts, who invest across global markets and assets, and rebalance the investments when Barclays’ economics team change their views on the best asset allocation for the current conditions.

If you aren’t sure whether you are ready to invest, or how to rebalance your investments, seek professional financial advice first.