Many people are worried that the economic impact of the coronavirus will drag Britain into recession.
As anyone who lived through the country’s last recession will remember, it triggered a rise in unemployment, personal debt and a major crunch on earnings.
Once the last recession died down, it took five years for the economy to get back to its pre-recession size, showing just how long many households may need to be prepared to tighten their belts for.
We are living in worrying and uncertain times, but there are five simple steps you can take to shore up your personal finances in the face of adversity:
1. Address your debts
Focus on using any spare cash to pay down expensive debt you have, such as credit cards or loans.
Time to focus: Focus on using any spare cash to pay down expensive debt you have, such as credit cards or loans
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 times get tougher.
Admittedly, 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. Interest rates are at record lows, which means the cost of debt has fallen slightly too.
Those with better credit records will find they have more options open to them, but moving your debt to a 0 per cent 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 rather than just paying off the interest.
If your finances have already been affected by coronavirus there is lots of help you can get from the bank, from interest-free overdrafts to payment holidays on loans and credit cards.
Be careful with the payment holidays though, as you’ll still pay the interest so it can cost you more in the long term.
2. Build up an emergency pot
Your next step should be to build up an emergency pot of cash that you can fall back on should you lose your job, see your income cut or face any unexpected costs.
The fact that one in eight adults have no savings at all, and 45 per cent of the population have less than £2,000 in cash shows how financially exposed many people are.
Start saving: Now is a great time to start building up an emergency pot of cash if you can
It’s a good idea to build up between three to six months’ of outgoings, so tot up your mortgage or rent, bills, and essentials and work out how much you need.
If this seems like a high figure then just put away anything that you can.
This money should be available immediately, so put it in an easy-access cash account rather than one where access to the money is restricted. But find the one that’s paying the highest rate of interest – at the moment this is about 1.3 per cent.
3. Take the red pen to our outgoings
A good way to generate some extra cash each month, and get your finances as lean as possible, is to use some of your new-found spare time to check you’re paying the cheapest price for all your services.
Start with the big things, such as making sure you’re on a competitive mortgage rate, which can save you hundreds of pounds each month.
If you’re worried about losing your job in the future then you might want to extend the term of your mortgage so your monthly repayments are lower.
Now is the time: Take a red pen to your outgoings and trim them down
Clearly this will cost you more in the long run, as you’ll be paying interest on the debt for longer, so you need to weigh up the pros and cons.
First steps are to look at how much interest you’re paying at the moment – if you’re on your lender’s standard variable rate then you’ll be paying far higher interest than new deals would offer.
But you also need to look at the available equity you have in your home, what your home is worth and whether your income is sufficient to be eligible for a new deal.
You should also be aware that a number of mortgage lenders have pulled some products at the moment, so you might not have as many options as you would have previously. Speaking to a broker could be a good starting point.
Once you’ve tackled that big outgoing, look at unwanted direct debits or bills that have crept up in price.
Whether it’s switching to a cheaper energy deal, assessing whether you really need five different streaming services or realising that your Sky package has shot up in price, there’s lots you can do just by going on a comparison website and hunting for a new deal.
Previously we all claimed we didn’t have time to do these life admin tasks, but now we have no excuses.
4. Cut lifestyle 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 the past month isn’t going to be indicative, but look back at the previous few months’ bank statements and work out where you’re spending your money.
Do you need it? Don’t spend more than you need to each month on items like clothes
As people gradually earn more they gradually spend more on their everyday lives, whether that’s buying slightly nicer clothes, going to better restaurants or on pricier holidays.
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.
5. Run a side-hustle
A lot of us have considerably more time to spare than ever before, so now could be a good time to turn your hobby into something that could generate an extra income or to learn a new skill that could turn into a new line of work or a second income.
If you’re worried about job security it could be good to have an alternative source of income to fall back on, even if it’s only small to start with.
Failing that, you could use it as a chance to de-clutter your house and earmark stuff that you’re not using anymore that could be sold to generate money.
Laura Suter is a personal finance analyst at investment platform AJ Bell.
THIS IS MONEY’S FIVE OF THE BEST CURRENT ACCOUNTS
Santander’s 123 Lite Account will pay up to 3% cashback on household bills. There is a £1 monthly fee and you must log in to mobile or online banking regularly, deposit £500 per month and hold two direct debits to qualify.
NatWest’s Reward Silver Account offers a £175 switching incentive to new and existing customers as well as insurance cover for European travel. Customers can also earn rewards which can be redeemed as cash or gift cards.
Club Lloyds’s Current Account offers benefits such as cinema tickets, magazine subscriptions and dining cards to current account holders. There is no cost if you pay £1,500 each month, otherwise a £3 fee applies. Must hold two direct debits to earn monthly credit interest.
HSBC’s Advance Account offers £175 cash if you switch to it. The account comes with a £1,000 starting overdraft and 2.75% regular saver account. There is no monthly fee, however you must deposit £1,750 per month into the account.
Nationwide’s FlexDirect account comes with 5% interest on up to £2,500 – the highest interest rate on any current account – if you pay in at least £1,000 each month, plus a fee-free overdraft. Both perks last for a year.
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