Laura Suter, personal finance analyst at investment platform AJ Bell, comments:
“The UK has fallen into its deepest ever recession, with the lockdown leading to a slump in the economy in the second quarter of the year. While there are signs of a rebound in June, which some herald as the start of the much-talked about V-shaped recovery there’s no doubt that lots of households will still feel the bite of the slowdown.
“Unemployment has already shot up and is expected to rise further before the end of the year, meaning many people will find money is tight and job opportunities are scant. As with previous recessions we’ll also see debt levels increase and earnings either stay flat or fall. But for those not yet affected there are ways to get their finances in order should the worst happen, so they can ride out the downturn as best as possible.
1. Deal with debt
“If you have spare cash it might be wise to use it to pay down any expensive debt you have, such as credit cards or loans. If you’ve got lots of borrowing in different places, find the debt with the highest interest rate and start paying that off first, before moving to the next highest rate. Moving this burden off your finances could really help if your income is cut or you lose your job.
“However, many people won’t be in a position where they have spare cash to be able to funnel into paying off debt. If that’s the case your focus should be on reducing the cost of any debt. There are a number of different schemes in place if you’ve been affected by the current pandemic, so you can get help from your bank, such as payment holidays – just make sure it’s definitely the right decision for you as they may cost you more in the long term.
“Otherwise look to shift your debt to a cheaper rate. Those with better credit records will find they have more options open to them, but moving your debt to a 0% credit card or a personal loan on a cheaper interest rate could be a good option, and means you can use more of your capital to pay down the actual debt each month rather than just paying off the interest.”
2. Cultivate your cash
“Your next step should be to build up an emergency pot of cash that you can fall back on should you lose your job, your income is cut or you face any unexpected costs. The fact that one in eight adults have no savings at all, and 45% of the population have less than £2,000 in cash shows how financially exposed many people are.
“It’s a good idea to build up between three to six months’ of essential outgoings, so add up your mortgage or rent, bills, food shopping and any other essentials and work out how much you need. If this seems like a high figure then just put away anything that you can. Crucially, this money should be available immediately, even though that’s not going to earn you much interest at the moment. Put it in the highest interest easy-access cash account you can find, rather than one where access to the money is restricted – at the moment this will pay 1.16%.”
3. Cut your costs
“Doing the ‘life admin’ of going through your bills and getting cheaper deals can seem boring, but it’s much less time consuming than it used to be and can save you loads.
“Your mortgage is where you’ll find the biggest savings, because the level of borrowing is so much higher. As a rule of thumb, if you’re on your lender’s Standard Variable Rate then you can probably get a cheaper deal. It obviously depends if your circumstances have changed since you last got a mortgage as to whether it’s feasible to switch, but at least do some internet searching or speak to an adviser to see if it’s possible.
“Once you’ve tackled that big outgoing, look at bills that have crept up in price. Whether it’s switching to a cheaper energy deal, realising that your Sky package has shot up in price or cutting the cost of your car insurance, there’s lots you can do just by going on a comparison website and hunting for a new deal.”
4. Slash the subscriptions
“Everyone is guilty of being lured in by a free trial and then forgetting to cancel it, meaning they are paying for a service each month that they’re not using. Amazon Prime is one of the worst offenders but there are subscriptions for everything now, from beauty boxes to pet food to razors. Go through your bank statements and see what you’re paying for and then work out whether you’re getting value-for-money and still using the service – if you aren’t, cancel it.”
5. Cut your creep
“Aside from the bills you pay each month, now is a good time to look at what you spend each month on ‘non-essentials’. Clearly lockdown isn’t going to be indicative of your usual spending as we’re all going out less and online shopping more, but look back at your pre-lockdown bank statements and work out where you’re spending your money.
“As people gradually earn more they gradually spend more on their everyday lives, whether that’s buying slightly nicer clothes, going on more expensive holidays or eating out at fancier restaurants. It’s so small that we often don’t notice it, hence the term ‘lifestyle creep’. There’s nothing wrong with this as long as you’re living within your means, but it’s a good idea to pinpoint areas where you can easily cut back and save money, should you need to.”
6. Sort your savings
“Lots of people who have been fortunate enough to keep their job and same level of income in the current crisis have been saving money each month. Whether it’s not paying for childcare, ditching the commute or just going out less, some people have been able to stash some cash away. But make sure it’s getting as much interest as possible.
“The Bank of England cutting rates and the high demand for savings accounts means you’re not going to get loads of interest on your money, but far too much is sitting in current accounts earning nothing or old savings accounts paying a pittance.
“The top easy-access cash rate at the moment is 1.16% from NS&I, which is also Government-backed so will give savers peace of mind. You’ll only get slightly more, at 1.2%, if you lock the money up for a year so that likely won’t be worth it for many people. But if you’re willing to have some tie-up and use a notice account then you could get 1.4% with a 95-day notice with ICICI Bank.
“Alternatively if you’ve already got enough cash and your emergency fund is sorted, think about investing some of it for a potentially higher return. Just be sure that you aren’t likely to need access to it for five years or so and be comfortable with any risk you take.”
