The vote to Brexit has sent the UK into a state of upheaval. At times it’s felt like a mashup of The Thick of It meets Big Brother.
Indeed if we are living in a computer simulation – as Tesla’s Elon Musk recently reminded us is probably the case – then ours seems to be scripted by Monty Python. A sort of Sim and Insensibility virtual reality game for political masochists.
We thrashed it out in the comments, and rarely was much twain met.
The question now is what should you do as a financially-engaged citizen to best navigate whatever comes next?
Winter is coming. Probably.
Some think the UK will see no consequences from the decision to Brexit.
But most agree the uncertainty alone will cause at least a short-term dip.
Personally, I think it’s a good time to batten down the hatches:
- Bank of England governor Mark Carney says the risks he foresaw are crystalising.
- The pound touched a 35-year low as global capital has bailed.
- Shares in UK focused companies such as UK banks and housebuilders are down 20% or more.
- The GfK consumer confidence index has seen its sharpest drop for more than 20 years.
- Online job adverts halved in the week following the result.
- Property funds have locked-in nervous retail investors.
- Two-thirds of Institute of Directors members polled say the Leave win will hurt their businesses.
I don’t say a recession is a certainty. Nobody can.
Here’s one forecast (from KPMG) on the potential impact of Brexit:
All the ingredients are there for a potential recession, but will KPMG’s tea leaf reading prove 100% correct? Very unlikely. Comprehensive forecasts are never entirely right (and usually somewhat wrong).
But it looks like a fair stab at predicting the near-future, and in-line with most informed takes I’ve read.
At the least: The range of potential outcomes has increased, and greater uncertainty means greater risk.
Things may well turn out for the best. But when the potential downsides have magnified, then I believe it’s only logical to get more defensive with your personal finances, and perhaps with your investments, until we have a clearer sense of what’s going on.
And hey – if everything turns out rosy then at worst you’ve saved more money!
How to prepare for a recession
Most of us have lived through one or more recessions. How they affect you really depends on the severity of the recession, and your circumstances at the time.
- Someone who keeps their job, enjoys seeing their mortgage costs fall, and watches their investments rise with a weak pound might not even notice.
- Somebody who has overstretched themselves financially, can’t find work, and has nothing to fall back on could be scarred for life.
We have a safety net in the UK. Our taxes fund a decent welfare system and a free-to-use health service, so we see fewer of those middle-class to middle-of-the-highway stories you read about in the US.
But there are less dramatic ways to suffer from a recession – especially if you’ve got dependents – and they’re all best avoided.
How? Act early, reduce risk, shore up your position, and revisit every expense.
Get started with this before a recession is obviously upon us.
Some will say this is scaremongering, or that if everyone acts this way then we’ll talk ourselves into a recession.
I say: Not my problem!
Just as I thought the bank runs of 2008 were perfectly rational, I’m not interested in whistling past a potential graveyard in order to take one for the team.
Besides, my website statistics tells me only a tiny minority of the UK population reads Monevator.
Inexplicable, but we’re unlikely to trigger financial Armageddon on our own.
It’s not the pension portfolio that you don’t need to touch for 30 years that kills you in a recession.
It’s your family’s pricey second car, or your financially shaky buy-to-let, or the dubious business venture that goes wrong, or the personal loan you never paid off.
“It’s only when the tide goes out that you learn who has been swimming naked,” says Warren Buffett, gazillionaire.
Make sure you’re covered.
Shore up your position
What do you take for granted now that could look precarious a year into a deep recession?
Your job? Those tenants who are always two weeks late with the rent? Your depleted emergency fund?
Think doubly hard if you’re a small business owner or contractor.
To mix my metaphors – show some love to your golden goose, and throw out any rotten apples.
Revisit every expense
Zero-based budgeting is all the rage in racier boardrooms. It entails going through every expense a company has at the start of each period, and justifying or rejecting its continued existence.
Just like companies acquire bloated payrolls or costly perks in the good times, so our own household finances might be carrying a lot hangers-on – from rarely-used gym membership to that £100 a month you’ve been subbing to your eldest son for beer money at Uni without telling your partner.
Purge! Purge it all!
Some ideas to get you started
This kind of household right-sizing is obviously down to you as an individual. You know how much you earn, what you’ve got invested, where you’re wasting money, and what you can’t do without.
You need to work out what matters most to you.
Here’s some ideas to get you thinking.
- Take responsibility.
- Set aside a weekend to do a statement of affairs. Are you solvent?
- Many people find creating a budget is helpful to learn where their money is really going.
- Begin a conversation with your partner. You don’t want to shock them in six months when that cottage in Devon is, um, sold.
- If you have a financial advisor you trust, now might be a good time to visit them.
- Back up your earnings. Consider looking for additional work, ideally separate to your main employer. Even just a couple of evenings a week. If you’re made of fancier stuff, could you add some consultancy or similar to your roster?
- If your employer says they may need to let people go if things don’t get better, quietly consider yourself fired TODAY and go into survival mode with respect to budgeting and saving. Better sooner than later. (Perhaps look for a new job, depending on your circumstances. But certainly save all you can).
- Be prepared. Will you be offered a redundancy package? What happened at your company in the last recession? What are your rights?
- Read your contract.
- Run your own business? You’ve got to balance taking evasive action now (and doing the sort of things I’m discussing here on steroids) with potentially missing out if things turn out alright yet you’ve reduced your capacity too severely. Still, the first cut is often the cheapest.
- Get out of debt.
- Seriously – if you’ve got anything but mortgage debt, then start figuring a way to pay it off as your top priority. Work evenings. Sell furniture. Eat healthy and ultra-cheap.
- Repair or enhance your emergency fund.
- Reevaluate your racier investments. Thinking of getting into buy-to-let? Perhaps give it six months. Own five flats already? Maybe sell the weakest one. Can you really risk owning that quarter-paid-for holiday home? (Perhaps – as I say this isn’t one-size fits all. My point is you should look objectively at your situation).
- If you’re a passive investor, make sure your asset allocation is good for all-weathers. Don’t be reactive, but if you were cutting corners with diversification in the first place for no good reason, it’s time to get sensible.
- If you’re an active investor, make sure you’re not invested in crazy blue sky story stocks at the expense of sensible investing. Now might not be the best time for ‘fun punts’.
- Either way, are you over-invested in equities? Shares are jolly when the market is going up. Not so much if they halve. If you’re on track to hit your number at a lower level of risk, why are you taking on more?
- Make sure any essential insurance – vehicle, home insurance, life insurance if you have dependents – is in place.
- Consider additional insurance if you’re very concerned, but do your research and get advice if required. (Insurance to cover vital payments or potential redundancy sounds great, but not if it costs you a fortune, impoverishes you, and doesn’t pay out when you need it. I’m no expert on this, but the advice is out there).
- Peer-to-peer lending could be tested in a downturn, especially the more exotic offerings offering 10%+. Don’t be greedy.
- Favour liquidity. Remember cash is king in bad times, and triply so if you lose your job.
- Personally I’d consider holding on to cash rather than making over-payments on a mortgage at today’s low rates if you’re short of non-property assets. Again, cash is king – provided you can trust yourself not to spend it. Ideally you’d do this with an offset mortgage, but even keeping an extra £5,000 to £20,000 in something like Santander’s 1-2-3 account rather than overpaying your mortgage – and hence locking up your money – will give you more flexibility.
Shore up your position
- If you’re like most people, your salary is your most precious income stream. Look after it!
- Try to be a profit center, not a cost to carry.
- Use the same techniques you’d apply to getting a raise to make yourself less dispensable in a downturn.
- Do all this before anyone else is thinking about it.
- If you’re a freelance or a contractor, you could be culled first. At least be likeable, dependable, and add value.
- Get more clients.
- Get new clients.
- Try to make sure all clients are good to pay. Chase late payers!
- Consider getting an extra job, or some other way to earn extra money.
- Better yet, send a sit-at-home partner off to work too for a bit every week. Even £50-200 a week can be very helpful if things get tough, depending on your household’s burn rate.
- Can you increase your monthly contributions into your emergency fund?
- Can you build a bigger cash buffer some other way? (Sell something!)
- If you’ve got a lot of cash saved beyond your emergency fund that you don’t need to access, it might pay to lock it up for a year or two before the best fixed rate savings offers are withdrawn. (Ideally choose one with some sort of emergency early access).
- Consider remortgaging your home to secure a longer-term low-cost fixed rate. It may work out more expensive, but it could be worth it for the security. Decide what matters most to you.
- I’d try to keep investing for the long-term, even a small token amount each month. (If you have found this website and you’ve read this far then there’s almost certainly one more thing you can cut to maintain the investing habit.)
Revisit every expense
- Stop smoking.
- Do you really need gym membership? Use the stairs and do press-ups.
- Do you really need Netflix as well as Sky and Amazon Prime?
- Do you really need Sky and Amazon Prime as well as Netflix?
- Look at all your household bills. Switch suppliers to save £25 off gas, £15 off electricity and £5 off water a month and you’re banking an extra £500 a year.
- Can you reduce bills further by paying by direct debit and so qualifying for a discount?
- If you pay taxes on dividends or interest and you’ve got an unused ISA allowance, you’re an idiot. Taxes eat your wealth.
- Sell your expensive car or get out of your lease contract, and get something cheaper. Maybe a bike or in London an Oystercard.
- Could your family take a holiday closer to home so you can sock away an extra wodge for a rainy day? (Mauritius can wait for the next boom…)
- Choose to rent somewhere a bit cheaper if you’re currently looking. If we do enter a recession then haggle even harder to reduce your monthly rent.
- Own your own home? Is your house a 90%-mortgage backed indulgence that you can only really afford if both of you keep your jobs and all your bonuses come in on-target, just like in the good times? Really? Might want to rethink that.
- Watch out for frivolity-creep like daily lattes or e-books you never read or the occasional takeaway blowout that’s become a Friday night staple.
- Have you been supporting family members, or direct debiting into a niece’s Junior ISA? Good for you, but if your numbers are looking tight you may need to stop it. You have to look after your own first. Try to make it up later.
- Sell your super-yacht if you’re rich. Skim through these 101 money saving tips if you’re not.
Also see my co-blogger’s excellent article on saving tips for a more motivational pep-talk. He went from a big spender to a master saver through the judicious use of a budget.
More ideas? Please add them in the comments below.
Stay alert for surprises
Because so much is now potentially in flux, it could pay to be even more engaged with your finances than usual.
I’m not talking about swapping passive investing for twitchy day-trading.
If you’re a passive investor with a proper asset allocation, leave it be. (You’ll probably do better for it).
However with your personal finances – or any active investing you engage in when The Accumulator isn’t looking – this is not the time for complacency.
Surprises could be positive or negative. Political risk is elevated (though Theresa May becoming Prime Minister will definitely sooth some nerves). Future policy responses might soften or delay the blow – at least for a while.
The Bank of England will almost certainly cut interest rates to 0% in the days and weeks ahead, for instance. The relative futility of that gesture means it’s also highly likely to restart QE.
That would be bad for savers who leave their cash languishing in terrible savings accounts. But it could be good for other kinds of investments.
I also expect various government actions to try to puff up animal spirits – or even just to inject cash into the economy.
Besides approving new airport runways or similar, this could involve things like cutting corporation or capital gains tax, further changes to stamp duty, and perhaps panicky measures like the financial crisis’ temporary cut in VAT.
The State’s strained finances will be weakened by any recession, however, so ministers might decide to try to make up the difference with tax raids, such as re-freezing the higher rate income tax threshold. (Could you re-budget to save more into your SIPP if they do?)
Even if you’re confident you’ll retain your earnings power in a recession, being nimble might help you grow your wealth.
Hope for the best, but prepare for the worst
The lower pound should prove stimulative, eventually, should it persist for more than a few months.
If you’ve got a globally diversified portfolio then it should have already cushioned some of the existential pain at home by boosting the value of foreign assets – as well as the share prices of companies that earn most of their money overseas, like the bulk of the FTSE 100.
And with luck this will be just a UK recession. If it sparks off something serious in Europe or wider still, then any pain will cut deeper.
On a national level the weaker currency will probably initially be negative due to it pushing up import costs, but over time improved competitiveness should boost overseas sales.
Conceivably your job might even be more secure now if your customers are in the US or China rather than in a housing estate down the road or, perhaps, France.
So stay alert to your own situation.
In the long-term, I’m not at all optimistic that Brexit will lead to a stronger economy than if we’d stayed in the EU.
But equally I don’t think the world is ending.
While we wait to find out, let’s be careful out there.
Please note: Suggestions as to how other readers might take action ahead of a potential recession are very welcome, but no political debates today please. If you think there’s not going to be a recession, good for you. Maybe there won’t be. This isn’t the post for discussing why. To keep things on track for the majority, I will be deleting off-topic commentary. Thanks! 🙂