How do I prepare financially for a recession?

The UK fell into a recession in the second half of 2023 after gross domestic product (GDP) declined by 0.3% between October and December and 0.1% between July and September. 

Thankfully, by the first quarter of 2024, the UK exited recession with a modest 0.7% GDP growth, according to the Office for National Statistics (NOS), which continued through the second quarter.

This wasn’t the first time the UK has been in recession, and it’s unlikely to be the last.

Recessions are a natural part of the economic cycle, and although difficult, they often aren’t as bad as many feared initially. Two consecutive quarters of negative GDP growth are classified as a recession, and something we’ve grown to expect as part of our economy. 

The UK’s last recession was a result of the COVID-19 pandemic, and although many forecasters correctly predicted its severity, few foresaw how quickly our economy would recover.

Nevertheless, this doesn’t mean people aren’t justified in being worried that any recession, whether it's mild or severe, will have a major impact on their finances.  

Here, we share our top six tips to help you prepare your finances for a recession.

1. Save up an emergency fund (if you can) 

With high household bills, any future recessions make the risk of redundancy more likely, so it’s sensible, if you can, to save enough money to cover three to six months’ worth of expenses. 

It’s also worth considering how you could access this money. If it’s tied up in investments and would take months to withdraw or come with additional charges, this may not help to cover unexpected last-minute expenses. 

This will give you the peace of mind you can withstand any financial shocks without having to take on additional debts or fall behind with bills.

This emergency fund can also help you pay for the unexpected, such as a leaking roof or damaged car, without having to incur any debt.  

If you’re not in a position to save, however, there are a number of ways you can make savings within your everyday expenses.

Check out this article on mindful spending to find out more.  

2. Reduce debt  

Pay off whatever debts you can, starting with the most expensive, which are usually credit cards. It’s known as handling the debt avalanche to start with the highest interest rate debt first. 

If you’re not able to pay down your debts, see if you can reduce the amount of interest you’re paying. A balance transfer credit card, for example, may offer a 0% interest period so you can clear debt.

For those with multiple debts, consider consolidating them into one place. Even if there’s little improvement in the interest rate, having your debts in one place can make them easier to manage. 

A debt adviser can help you if you’re overwhelmed by your debt and advise on how to reduce it.

3. Invest wisely 

Oddly, recessions aren’t necessarily all bad news.

There are opportunities for anyone willing to invest in companies with a history of being resilient in the face of an economic downturn.

Previous recessions have taught us that spending on essential goods, such as prescription medications, rarely drops during a recession, so the companies that provide these items can prove a wise investment option.  

If you are considering investing more generally, make sure to invest for the longer term.

Remember too, if interest rates rise, your cash will be worth less.

So, if you do have significant savings in cash, now might be the time to consider alternative investment options.

Investing always carries risks and it’s crucial to do thorough research or consult a financial adviser before making investment decisions.

4. Fix your mortgage 

If your mortgage is expiring soon, it could be an ideal time to talk to a mortgage broker.

Mortgage rates have been falling throughout 2024, and while they are currently high compared to rates over the last few years, you could get peace of mind by fixing.

It’s always a good idea to make sure you can afford higher monthly payments if rates soar again, as they have done over the past few years.

If things are a little tight, re-evaluate your monthly expenses to see if you can make any savings.

5. Check your insurance  

Your greatest asset is your income, so it’s important to make sure it is protected if you become unable to work due to illness or injury.

Income protection or critical illness cover can prove a financial lifeline for you and your family if you become too ill to work.  

If you’re still paying into a mortgage, you may want to consider mortgage life insurance.

This product will pay out a lump sum to your family if you die prematurely, ensuring they aren’t burdened with the remainder of your mortgage debt.

The likelihood of this happening is small, but preparing for every eventuality can be invaluable for peace of mind.  

6. Prioritise your pension 

When finances are tight, too often people prioritise other expenses over their pension, but your pension is a great and tax-efficient way to save.

It’s hugely important to protect that asset, even when the temptation may be to cut back on your contributions.  

People approaching retirement may be concerned if their pension fund has decreased in value due to a falling stock market.

For most people, this shouldn’t be an issue since the risk level of a pension portfolio decreases as you get closer to retirement age.

However, if you’re at all unsure, speak to your pension provider to make sure this isn’t the case.  

If you don’t already have a pension, now could be the ideal moment to start.

Get expert financial advice 

You can prepare for a recession with good financial planning and expert advice, as well as by adopting smart investment strategies and reducing your debt as quickly as possible.

Let Unbiased connect you with an expert financial adviser who can help make your finances as recession-proof as possible.