The signs are there: something big is coming. Consumers are holding their breath, waiting for events to unfold, that much is clear from the CBI’s monthly survey of the retail sector, which found that sales have suffered their sharpest monthly decline since the financial crisis.
Perhaps the uncertainty is coming from Brexit, which at best will be a profound economic shock, perhaps it’s the rising consumer debt, maybe shoppers are worried about inflation or the likelihood that interest rates will rise further.
If the economy were a dinosaur movie, we’d be seeing ripples in a glass of water by now. Something is coming. And whatever that something turns out to be, it’s important to be prepared.
Vikas Shah, a serial entrepreneur and honorary professor of business and entrepreneurship at the University of Manchester, warns: “Our economy is more connected and more exposed to risks than ever before; for individuals now, the key risks include rising interest rates, a housing price correction, rapid inflation rises, decline in global markets and – of course – unexpected policy and taxation changes.”
We’ve been asking financial commentators and analysts exactly what households should do now to be ready for the next big bang.
1. Build a buffer
One of the best things any household can do to protect their finances is to amass some savings so that they do not have to rely on credit in an emergency.
Ben Faulkner, a director at EQ Investors, says every household should save what they can to build up a decent cash savings buffer.
“Building up a cash reserve for unexpected expenses protects you and your family. Keep growing your emergency fund until you have accumulated three to six months of expenses held in cash deposits that you can easily access.”
2. Make a budget
A key way to prepare for future financial uncertainty is to have a clear oversight of what your weekly and monthly expenses are. That way you know how much you have coming in and going out, and it will be easier to identify where it’s possible to cut back.
Having a clear budget can also make it easier to save money each month. The Government-funded website the Money Advice Service has a free budget planner tool and lots of advice.
3. Minimise your monthly outgoings
We are a surprisingly apathetic nation when it comes to finding the best deals on household bills and this can cost us hundreds of pounds over each year.
Acting now to move onto a better rate for energy, banking, phone and broadband, and other costs can help ease your budgeting over the coming months.
Shah suggests: “Set some time aside to make sure you do a full review on your borrowings, savings, assets and financial position and make sure you shop around to get the best deal for you and your family.
“Sometimes these savings and incentives may not feel like much, but you can be very sure they add up to a lot.”
4. Have the right current account
If a difficult financial period makes it more likely you will slip into an overdraft then having the right current account can make a huge difference.
The website moneyfacts.co.uk analysed overdraft charges and showed that some accounts charge several times as much as others for the same borrowing, meaning that finding the right account can save a substantial amount.
Rachel Springall, spokesperson for the website, says: “Debt can escalate into a stressful issue for consumers relying on their overdraft facility to make ends meet. If they use it too often or dip into the red by a significant amount, it’s a convenience that will likely cost them dearly over time.
“Some overdrafts can charge borrowers daily fees and these can add up to a hefty sum over just a few weeks.”
5. Make your savings and investments work harder
Market shocks and the risks of inflation can eat away at the value of your household’s wealth and Richard Flax, chief investment officer at MoneyFarm, says it’s essential to be proactive about savings and investments to ensure they aren’t damaged by market conditions.
He urges: “When it comes to your long-term savings, make sure inflation isn’t eating into the purchasing power of your money. Make your savings work harder for you on the markets – that way you can try to protect your money from inflation and grow it for your family’s future.
“It’s ‘time in’ the markets, not ‘timing’ that’s most likely to help you achieve your financial goals. By adopting a little and often approach to investing, you can smooth out fluctuations in the price you pay for your investments.
“Investors are always looking for that elusive edge in financial markets, when often the greatest edge you can have is simply a long-time horizon.”
6. Look at earning extra
If things did get tight, it would be good to have some extra earning opportunities to fall back on and so now is a good time to consider ways to bring a little more money into the house.
For example, if you have a spare furnished room that you could consider renting out, you could earn up to £7,500 a year tax-free under the Rent a Room scheme. Check out the official guidance.
7. Plan for rate rises
The Bank of England has dropped some pretty pointed hints that further rate rises are on the cards and it’s essential to factor that into any household financial planning.
Of course, even if rates creep upwards, they are a long way off the pre-2008 levels, meaning debt is still relatively cheap.
But Matthew Cooper, director of postgraduates programmes at Arden University, says it’s essential to think about long-term financial strain and avoid debt if possible.
He says: “Interest rates now only have one direction left to go: up. It is too late to preach advice about over-committing to large mortgages. So how might homeowners best prepare for further impending rises in interest rates?
“Try wherever possible not to commit to other mid- or long-term loans. Even if low-interest or interest-free, these payments will still be a drain on your monthly bank balance, and you may well need these finances to help bolster your mortgage payments.”
8. Lock into an affordable repayment plan
If you’re in debt then it’s time to think about protecting yourself from any future uncertainty.
Duncan Donald, chief executive of the London Academy of Trading, urges debtors to be proactive: “Serious consideration must be given to the affordability of debt. The reality is that rate hikes are expected over the next few years.
“I would encourage anyone with debt to start giving consideration to sharper repayment plans wherever possible, and I certainly would advise a proactive approach to debt. Look for the most efficient method of repayment by locking in an interest rate that is affordable, rather than being at the mercy of an increasing variable rate.”
9. Overpay your mortgage where possible
This may not always be an easy task, but overpaying your mortgage can give you far more options, especially if any future financial crash caused house prices to fall.
Many first-time buyers only have a small amount of equity in their homes, meaning that if prices fell even by 10 per cent they could end up owing more than the property is worth.
Ishaan Malhi, chief executive and founder of online mortgage broker Trussle, says: “The problem with being in negative equity is that it makes moving home very difficult. It can also obstruct your ability to remortgage. You could slip onto your lender’s high-interest standard variable rate as a result and become trapped as a mortgage prisoner, unable to switch to a cheaper rate.
“While this is a highly unlikely scenario, you can improve your position by overpaying on your mortgage where possible. Doing so will reduce your overall amount of debt and you’ll gain more equity in your home.”
Of course, it’s important to check how much your lender will let you overpay so you don’t get caught out by penalty fees.
10. Read up
Shah says: “For many, the financial press can be a bore; but it’s really important to make sure you keep absolutely up to date with what’s happening in the financial world, as it impacts your money on a day-to-day basis.
“The Government may change a policy, a large company may hit difficulties, there are a number of things which can impact you and your money that you need to keep track of.”
We’d certainly agree with that, except of course the idea that the financial press can ever be a bore. Let’s just hope that whatever is around the corner is not too exciting or terrifying.
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