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Double-dip recession: top tips for your circumstances
Is it time to recession-proof your finances? The economy's shrinking, and a panic wave of worry has swept across the nation. Yet before we all go battening down the hatches, risking making things worse, it's worth taking a moment to actually think about what recession really means for our pockets.
The technical definition of recession is that the economy has shrunk for two quarters in succession – in other words, six months. Therefore it's important to understand being in recession's a reflection of what's already happened, rather than a prediction of what will happen.
The announcement that we’re now in a recession hasn’t actually changed anything: the bad causes are in the past, not the present. In previous recessions the announcement has been a precursor to an economic nosedive, but the graphs are slightly different this time. We’ve been flatlining for years, and the falls over the last six months are fractions of a percentage, a slight worsening of an already poor economy.
So it's likely that rather than any huge deterioration, this is a case of ‘more of the same’. Though with the economy, of course, anything could happen.
Therefore, far more important than the wider economy are your own personal circumstances. If you've a stable job in a strong company, little's changed. If redundancy looms, preparation's crucial. If you're on benefits or unemployed, it's about continuing the struggle.
Here are my top tips for a range of circumstances:
1. Everyone should build a cash emergency fund
Provided you've no debts (excluding your mortgage), save enough cash for six months of bills. Put it in the top unlimited withdrawal easy-access savings or cash ISA (see www.mse.me/savings for daily updated top rates), so you can get the money out when needed. This way, if you were to substantially drop income, there’s a safety net.
2. Pay off costly debts with savings
£1,000 on a credit card at 18% is costing you £180 a year. The same cash in a savings account at 3% would only earn you £30. Pay off the debt with the savings and you’re £150 a year per £1,000 better off. If you’re worried about having no savings for ‘emergencies’, I'm not saying cut up the credit card. If you have a true emergency (your roof falls in, not new shoes), use the card again and you’ll be in no worse position than you are now, but will save interest in the meantime.
3. Urgently cut debt costs
If your income's likely to drop, through redundancy or less overtime, it's easier to cut debt costs before your credit score is hit. For example, balance transfer debts to Barclaycard's 22 months 0% with 2.9% fee (then 17.9% representative APR). See mse.me/bts for full help and best buys. Sadly, if you lose your job you'll often pay more for car insurance and home insurance, so if that’s likely, sort sooner.
4. Know your redundancy rights
If your job's likely to go (or has gone) and you've been there over two years, you've a legal right to a pay-off, notice and pay for unused holiday. Even if your employer's gone bust, you can get money from the National Insurance fund. There’s much more help on this at acas.org.uk
5. If redundancy's likely, live like it's happened
Money earned now needs to be spread across a period of unemployment. So don't think "I'll sort it when it happens". Start living now as if you've lost your job: eke out the cash and do a budget across the period to try to make it work.
6. Use credit cards to ensure big purchases are safe
Sadly, firms go bust in recessions. If that happens and ordered goods haven't arrived, or have but are faulty, it's a nightmare. However, Section 75 laws mean that if you use a credit card (not debit card, cheque or cash) to pay even partly for something costing between £100 and £30,000, the card company's jointly liable for the whole amount. If the firm goes bust, you can get redress from the card firm instead – valuable extra protection.
7. Are you getting what you're entitled to?
Many families and individuals – both in work and out – are eligible for state help for their income. The web of benefits and tax credits stretches much further than many people think, so it's important to check you’re getting what you’re entitled to. Use the benefits checker at mse.me/benefits to give yourself a check up. It’s worth noting over a million low income pensioners are failing to collect their pension credits.
8. Beware income eaters
If you're worried about the future, don't sign up to what I call income eaters. These are contracts for regular payments that lock you in. I’m talking about things like gym membership, pay-TV and hire purchases. Check your active direct debts with your bank to ensure you are not paying each month for things you no longer use.
9. Check your savings are safe
While we're not saying they will, big banks can collapse. The government guarantees £85,000 per person, per UK-regulated financial institution. If you've more, spread it in multiple accounts. With the eurozone also in trouble at the moment, it's especially important to look at the protection of European banks operating here too. If they’re UK registered, as Sanatander is, then the same £85,000 protection as any other bank applies. Yet some, such as Dutch bank ING Direct, are protected by their home country’s government. So you’d have to rely on it to help.
10. A warning to freelancers and the self-employed
As your income can be particularly precarious, don't forget to put money away for tax. Unlike employees, who are paid after tax, freelancers are usually paid pre-tax. Always think: "For every £100 I'm paid, £30 isn't mine, it's the taxman's". Put it elsewhere to save temptation.