With the current cost of living crisis and increased expenses everywhere, we look, it’s no surprise we see the word recession thrown around a fair bit right now. The Bank Of England, in fact, has warned that the UK is looking at facing a prolonged recession, predicting England’s economy will be one of the worst hit in the G7 nations.
Things are rising in cost at the highest rate in over 40 years, cutting peoples’ and businesses’ budgets even further, causing a lack of spending and the economy to shrink. The latest figures have shown a decrease of 0.6% in September alone.
In our latest blog, we will discuss how you can financially protect yourself in the upcoming times of uncertainty.
What is a recession?
Let’s start with the basics; before you can learn to protect yourself or your business from it, you need first to understand what a recession is. A recession is defined as “the economy shrinking over two consecutive quarters or six months.”
When the UK economy does show signs of worsening, it is usually a sign that consumers are spending less money, most likely because the average consumer now has less money. This has a knock-on effect on businesses that are now able to produce and sell a much smaller amount of products or services.
We can see this and measure the strength of our economy using GDP. But what is GDP? GDP, or gross domestic product, measures the size of the economy and is a figure based upon information from thousands of businesses around the UK.
What could cause the UK to enter a recession?
The primary attributing factor to the talk of a recession in the UK is the increased cost of living. Bills are getting higher (especially gas and electric), things such as food and clothes are becoming more expensive, and borrowing costs are on the up and up; inflation is currently at a whopping 10.528%. Because of this, people simply are not spending what they were previously, and less money is flowing into businesses for goods or services.
Two-thirds of the UK’s GDP is accounted for by consumer spending, and when this slows down, the economy shrinks.
The last recession we faced was during the tumultuous time of covid 19, the GDP shrank by over 10%, the UK’s worst economic performance in over 200 years, but this was a vast drop when compared to the one previously in 2008, which had a much longer-term effect. It took the UK’s economy five years to recover and get back to the place it once was following the recession in 2008.
How could a recession affect you?
A recession isn’t something that will only be felt by businesses; it can trickle down and affect the lives of everybody in every situation. Even after the recession, when things have started to recover, you may not be free of problems for quite some time.
It could affect you by:
- The shops you once visited and loved may close down
- You may find it difficult to find new work if you lose your job
- Or a promotion/pay rise in your current line of work
- Jobs could be more easily lost as business look to cut costs
A recession will not be felt across the board equally by all. A recession could actually create more of a gap in society and widen the space between rich and poor. If you have savings and some more diversified streams of income, you will be better off than those who do not.
Take a look at my advice on the best ways you can deal with the impending recession.
Recession Proofing tips for businesses
Never stop marketing your business
Whether the economy is good or bad, one thing you should never stop, is trying to draw more customers or clients, and the best way to do that is with a good marketing strategy. It may seem like a quick and easy option to cut expenses in the short term, but in the long run, you may be negatively impacting your profits. After all, you can’t do business with potential clients or customers if they don’t know you exist.
Capitalise on existing customer relations
Following on from gaining new clientele, you should make the most of the existing customer relationships you have. Reach out to existing or old clientele to find out how you can help them and potentially upsell some of your other services or show them why you are better than your competition. Another benefit of this is its cheaper to reach out to people that are already aware of your business, you can offer a variety of bonuses like exclusive first access to new products or special discounts.
Care for your cashflow
During times of uncertainty, it’s imperative that you monitor your cash flow. As simple as this may seem, many businesses will continue to make similar mistakes, be sure you’re not spending excess money on overstock or potentially useless software. Another way to monitor your cash flow is to send out your invoices and review your receivables promptly; this way, you can be sure you’re paid what you’re owed on time, and things don’t slip through the net or get forgotten about.
Get an accountant
As mentioned previously, it can be tempting to cut expenses when facing financial difficulty; this could include getting rid of your accounting aid. Similarly to marketing, this may seem like a quick fix to save some money, but in the long run, you may be hurting your overall financial situation. When under stress, one of the best chances you have at staying in a strong financial position is with the help of a financial wiz in the form of your accountant.
Accountants can also save you money by eliminating excess expenditures and mistakes in your bookkeeping or when filling out your tax returns. When doing your own accountancy, you run the risk of making mistakes like over or underpaying your tax, which could lead to further problems and cost you more in the future. When using an accountant, you can rest assured that everything financial will be taken care of, freeing you up to focus on other aspects of your business.
Personal finance recession proofing
Fortunately, some of the best ways you can recession-proof your finances are simple and basic strategies.
Save an emergency fund
If the worst does happen and you lose your job, you should ensure that you have something to fall back on. While you are in a position to do so, you should save an emergency fund. This should be an amount that would be able to cover any outgoings you may have for the next 3-6 months. This should provide you with enough time to be able to get back on your feet and find another source of income.
You should ideally keep this in an easy-to-access savings account. One that you can take from without to much trouble. Storing this in some sort of investment account might sound like a good idea, but these often make it more difficult to retrieve your money in any fast amount of time.
Avoid making big purchases and impulsive decisions
When making any decisions about your finances, they should always be thought out. Large, impulsive financial decisions could land you in trouble at the best of times, but that is especially true during a recession.
While it may seem great in the moment to buy that fancy new car or extra large TV, you may end up regretting that decision in future. With the potential impending recession, you should think more carefully about your finances and perhaps think twice before spending large amounts of money until the economy is more stable. Try to focus on bettering your current position and ensuring you will be financially safe should anything go wrong.
Look for ways to earn some extra income
If you have concerns that your job may not be secure or you think you will begin to struggle financially, should things worsen, you should look for ways to increase your income through different methods. Having multiple streams on income could help to protect you should one of those avenues dry up.
There are many ways in which you could look to earn some extra income. Try thinking about some of the other skills you have; for example, if you speak a second language, you could perhaps become a tutor online. Alternatively, if you live in a good area and have a driveway your not using, there are now sites where you can rent out the parking spot on your drive. There are many ways to earn a little extra money; you just have to be a little creative.
Live within your means and be careful of borrowing money
Sometimes having debt is inevitable, but it isn’t always a bad thing, so long as you can afford to pay it off in the required time scale. But when a recession is looming, you should be more careful about borrowing money. Recessions increase the risk of redundancies and can make it harder to find another job. If you have debts to pay off already, this could quickly lead to a downward spiral.
When the future is a little uncertain, you should look to pay off any debts you may have, such as loans and credit cards or even pay monthly clothes on apps such as klarna, as quickly as possible to reduce your outgoings. Once your debt has been paid off, you should try to avoid amassing any more. There is a famous saying I often remember that is “if you can’t afford to buy it twice, you can’t really afford it.”
Reduce your outgoings
The current cost of living crisis that is sweeping the UK is causing many people to look at their finances differently. If you haven’t sat down and evaluated your outgoings, now is definitely the time to do so. You may not realise how much of a toll your daily Pumpkin Spice Latte could be having on your bank account until you sit down and see it all written out. Even if you bought 4 of those a week over a month, that’s £68.
Evaluating your finances could easily show you places in your spending habits where you could save money. I’m not saying you should deprive yourself of luxuries; everyone deserves a pumpkin-spiced latte every now and again, but now is an excellent time to find out where your money is really going.