Financial Planning

Recession? How to shield your finances

Recession? How to shield your finances

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult an independent financial adviser.

The world has been through a tough few years with COVID-19. Despite the damage caused by the pandemic, western economies have muddled through quite well – avoiding the high levels of unemployment, business destruction and investment harm seen during the likes of the Great Recession (1930s) or 2008-9 Financial Crisis.

Looking ahead into 2022, however, some people are concerned about UK economic health. Inflation has risen to its highest level in 10 years (5.1%) and the Bank of England (BoE) voted to raise interest rates in December 2021, 0.1% to 0.25%, to try and bring the economy back under control. Whether a recession may come or not, how can individuals and households shield their finances against financial shock? Our financial planners share their thoughts, below.

We hope you find this content useful. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:

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Portfolio strategy review

A recession does not necessarily accompany a stock market crash, since it is often defined as “significant decline in economic activity” over months or years – e.g. negative gross domestic product (GDP), rising levels of unemployment and falling retail sales. However, recession does usually contribute to stock market volatility and bear markets. 

For investors, therefore, it is important to regularly check your strategy – ensuring your level of risk tolerance still reflects your goals. For instance, perhaps you have been saving for a house deposit for the last ten years, investing a large bulk of your contributions into shares. As you near the point where you might need the money, however, could it be time to start “de-risking” your investments (in case of a stock market crash)?

If you still have a long investment horizon in front of you – 20, 30 or more years, say – then this will likely be less of an issue. Over that time, you will expect plenty of recessions and stock market crashes. However, with the right long-term strategy, you can still expect your portfolio to grow, overall, so you can reach your retirement goals.


Financial stability check

Regardless of your wealth and earnings, each household stands by ensuring a healthy inflow of regular income which comfortably exceeds expenses. This allows you to cover your essential bills, spend on discretionary purchases (e.g. holidays) and save for the future – without too much trouble to your peace of mind. 

However, this financial stability can be severely upset without careful management of your assets. In particular, too much concentration of your wealth in a single asset – or having too much debt – can be very risky during a recession. For instance, the housing market can be turbulent during a recession. Prices might fall and tenants can be hard to come by. 

As such, those who have taken out too much debt to finance Buy-to-Lets might soon find themselves in precarious waters – trying to cover heavy mortgage payments without sufficient rental income. Here, it is important to review your asset base with a financial adviser to make sure your net worth is not exposed to excessive risk. Possibly, moving some of your assets to more “liquid” ones (e.g. shares, bonds, cash or Premium Bonds) could give you more financial flexibility during a recession.


Emergency & contingency planning

Here, you turn your attention to the great “what if” questions. What if I lost my job tomorrow and suddenly no longer had an income? What if I become injured and could no longer work to support my family? What if I died prematurely and my dependents (e.g. children) were no longer able to rely on my income?

Some of these “disaster” scenarios – e.g. redundancy – become more likely during a recession, but many are risks that we always live with. As such, there is never a bad time to review your financial protection plan to address these sorts of situations. Life insurance is often a good place to start. Here, you can arrange to have a lump sum pay out to your surviving loved ones should you die prematurely. This can help see them through the first few years of life readjustment – possibly paying off the outstanding mortgage.

Losing work can often be “smoothed over” by having a decent emergency cash fund ready – perhaps 3-6 months of living costs – to cover your bills as you find a new job. However, perhaps you experience a serious illness or condition (like a heart attack) which puts you out of action for a long time, beyond what your employer and Statutory Sickness Pay will cover. Here, it can be helpful to consider options like income protection and critical illness cover. The first will provide a replacement, lower income to replace your salary if you need a long time off work to recover. The second provides a lump sum if you are diagnosed with a specific “serious” condition such as certain cancers, strokes and major organ transplant.



Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:

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