Understanding recession: what it means for your money

Find out how a UK recession can impact your money, savings, and mortgage rates and what you can do to try to be prepared.

Have you heard the news that the UK is in a recession and wondered what it really means for you and your family?

Let’s forget about jargon like GDP, stagnation and percentage declines – you can get all the stats elsewhere.

Here, we’ll break down in simple terms what a recession can mean for your money so you know exactly what’s going on and how you can tackle it head-on.

What’s a recession anyway?

A recession is when the economy slows down for some time.

When it’s slow, people might spend less money, and businesses might not make as much money.

It’s a bit like when a car slows down because it’s running out of petrol.

This slow-down has to happen for at least six months for something to be called a recession. That means for two sets of three months in a row, the economy is not doing as well as it normally does.

But it’s important to remember, just like with the car, the economy can start to pick up speed again once it has more fuel (in this case, when people start spending more money and businesses begin to do better).

The last major UK recession, which was triggered by the global financial crisis of 2008 – 2009, saw many people across the country experience significant economic challenges.

What a recession may do to my finances

In short:

• Jobs: Finding a new job might be a bit harder, and some people might even lose their jobs. It’s a tough time for everyone.
• Money: You might find they have less money coming in, which could mean cutting back on treats or finding cheaper ways to have fun together.
• Prices: Sometimes, things like food or clothes might get more expensive, making it harder to stretch our pounds.

Jobs

Many companies struggle because people spend less money.

This means businesses earn less and sometimes may need to let employees go.

As a result, more people can find themselves without work, making it hard to pay for everyday needs.

Money

In the last recession, the cost of everyday items like food and energy went up, making it even harder to stretch the budget to cover all the necessities.

With more people out of work or worried about losing their jobs, families have less money coming in.

This can make it hard for many to manage usual expenses, leading to tighter budgets and less spending on non-essential items.

Credit

Banks will be much more careful about lending money.

If you’re looking to borrow money with a credit card, loan, or mortgage, it can be harder to be accepted and more expensive.

Debt

During a recession, managing debt becomes even more crucial.

Interest rates may fluctuate, affecting mortgage payments and loans.

Prioritising high-interest debt and finding ways to consolidate or refinance to lower interest rates can help finances (but, as above, it’s harder to get accepted for credit, and there may not be as many offers on balance transfer cards).

Credit scores

Economic downturns make it harder to keep up with payments, potentially impacting credit scores.

It’s important to talk to lenders if you’re facing financial difficulties, as some may offer support, such as payment holidays, that can help to prevent negative impacts on your credit score.

Housing market

The value of houses fell in many areas during the last recession.

People who wanted to sell their homes found it difficult to do so without losing money, and, generally, the housing market would slow down as fewer people could afford to buy.

However, it may be a good time for renters to try and negotiate a better deal, as landlords will want to keep their properties occupied.

Savings and investments

Interest rates on savings will likely be low, so hardly any extra money is made on savings.

This would also be the same for the stock market, which affects pensions and investments.

Insurance

Recessions might make you review your insurance policies to cut costs.

However, it’s definitely worth balancing out the cost versus what you actually need in case of unexpected events.

It’s a good time to shop around for better deals or negotiate with current providers for better terms.

How you can try to keep on top of it all

• Budgeting and saving: Having a full understanding of your budget can help you manage your money better with strict budgets and cut back on non-essential spending.
• Seeking additional income: Up your budget by looking for additional work, start a side hustle, or turn a hobby into a way to make extra money.
• Seeking support: Get advice and support from debt charities, financial advisors, and community groups to help manage debt and potential financial challenges.

Know your money

During rocky times, having a plan for your personal finances becomes even more essential.

This includes setting a budget, reducing unnecessary expenses, building a savings pot, and understanding your financial priorities.

Learning to manage your money effectively can provide a buffer.

Emergency savings

While it can totally feel like a huge stretch – I know, I get it – having savings to cover at least three to six months of living expenses can provide a financial safety net against a job loss or unforeseen expenses.

Plus, it can help reduce the need to rely on credit.

Even saving £10 a week, or a month, will start you off as I know how difficult it can be to save more with an already overstretched budget.

I’ve always found that using money saving apps can help automate savings without feeling the pinch so much.

As far as possible, it’s always worth trying to keep a focus on your long-term financial health. While your immediate thoughts may be just trying to survive, planning for the future is still essential.

“This, too, shall pass” – money troubles do not last forever.

Side hustles and alternative income

Generating additional income streams through side hustles or freelancing can give a much-needed extra cushion in a budget.

Keeping all your eggs in one basket (or just one job) leaves you at risk if there is a job loss, so having a few different ways of earning an income can give you a safety net.

Upskilling and reskilling

Economic downturns often push for changes in the job market, with some sectors pretty much shutting-shop while others may expand.

Invest in you!

Take some time to learn new skills or improve your existing ones, and it can improve your employability, open up new career opportunities, and give an additional layer of security.

Mental health and wellbeing

The stress and uncertainty of a recession can take a toll on mental health.

It’s important to get support, whether talking to friends and family, a community of like-minded people, or professional mental health services.

Know what’s happening

News can be doom and gloom, but keeping up to date with what’s happening is worthwhile.

The government may introduce new policies or changes to help during a recession, and you’ll want to take full advantage of any support you’re eligible for.

This could include tax relief measures, support for businesses, unemployment benefits, and other financial assistance programs.

What to try and not do

Don’t panic and make rash decisions

It’s better to take a deep breath, think carefully, and make decisions based on long-term goals.

It’s easy to worry when you hear about a recession, but making quick decisions based on fear, like selling off investments when the market is down, can lead to losses.

Avoid taking on more debt

When money is tight, it might seem like a good idea to use credit cards or loans to get by.

But, while it can feel like it gets you out of a hole in the short term, it needs to be paid back – with interest.

Taking on more debt can make things harder in the long run, especially if your income is uncertain.

Don’t stop saving completely

Even though saving money during a recession might be harder, try to put a little bit away if you can.

Having some savings in sinking funds can really help if there’s an emergency, like if your car breaks down or you need to fix something in your house.

If you have some savings set aside for emergencies, try not to use this money unless you really have to.

This fund is there to help you with big, unexpected costs, and it’s important to keep it for true emergencies.

Don’t ignore your budget

It’s more important than ever to know where your money is going.

If you don’t have a budget, now is a good time to make one.

And if you already have one, keep checking it to make sure you’re not spending too much on things you don’t really need.

Don’t cut off all spending

While it’s smart to cut back on unnecessary expenses, spending a little money on things that make you happy is okay.

Supporting local businesses can also help the economy. It’s all about finding the right balance.

And, if you are planning to make a big purchase, like a house or even smaller, like a new washing machine, make sure to do lots of research first.

Don’t ignore offers for help

If you’re struggling, there might be help available from the government, charities, or other organisations.

Don’t be too proud to look into these options.

They’re there to help people get through tough times.

What can be done?

When the UK faces a recession, the government and the Bank of England have tools to help lessen the impact on people’s finances and the economy.

Let’s look at what they can do, how others can help, and whether a recession is always a bad thing.

What could the government do?

1. Spending more money: The government can increase its spending on public services and projects, like building roads or schools. This creates jobs and helps keep money flowing through the economy.
2. Cutting taxes: The government can leave more money in people’s pockets by reducing taxes. This means families might have more to spend, which can help businesses and keep people employed.
3. Support for those in need: The government can offer extra financial help to people who are struggling, such as through benefits or grants. This helps those most affected by the recession.

What can the Bank of England do?

1. Cutting interest rates: Lowering interest rates can make borrowing cheaper for people and businesses. This encourages spending and investment, giving the economy a boost.
2. Quantitative easing (QE): This is when the Bank of England creates new money to buy government bonds. It aims to lower interest rates on loans and bonds, encouraging spending and investment.

Can anyone do anything?

Businesses, charities, and communities all play a part.

• Businesses can try to keep prices fair and retain employees as much as possible.
• Charities offer support, advice, and assistance to those in financial difficulty.
• Communities can support each other, from shopping locally to helping small businesses to community groups helping vulnerable neighbours.

Is a recession always a bad thing?

While recessions can be brutal and bring a lot of challenges, they’re not always entirely negative.

They can lead to:

• Innovation: Tough times can inspire creativity. Businesses and individuals often find new, more efficient ways of doing things.
• Resetting priorities: Recessions can encourage people to reassess what’s important to them, focusing more on frugality and less on unnecessary spending.
• Opportunities: Lower prices and interest rates can give opportunities for those with savings or stable incomes to invest or buy property (the rich get richer!).

How long can a recession last?

The length of a recession can vary.

Some might be short and last just six months to a year, while others can be much longer and more severe.

For example, the recession caused by the financial crisis in 2008 lasted for more than a year in many countries, including the UK.

How long a recession lasts can depend on a lot of things, like how quickly the government or the Bank of England can help fix the problems, how businesses and people adapt, and what’s happening in the rest of the world.