How you could prepare for an economic downturn

What is an economic downturn and how could it affect you financially if it happens? We look at ways you can prepare to help protect your finances.

You might be seeing more stories about the health of the economy in your news feed lately, and they can sound ominous. With the world’s geopolitical situation having been in a worrying state because of tensions and war, the effect on other areas such as trade, energy prices and food costs has been far-reaching for many economies. How can you prepare financially to help you cope if conditions in the economy deteriorate?

What is a downturn?

A downturn is when there’s a period of economic weakness that affects the production, employment, income and spending ability of a country. If things get worse then the economy could even shrink, which is when the value of all the goods and services produced falls – otherwise known as its gross domestic product or GDP.

Contractions can have a negative impact on businesses, workers, consumers and the government. The UK economy shrank in 2020 during the pandemic and lockdown – prices of things such as food, fuel and energy all went up, which affected people’s finances and ability to meet the cost of living. Between the COVID-19 pandemic and conflicts in Ukraine and the Middle East, it has been difficult for the economy to recover.

What can you do to prepare?

While we can’t influence the GDP of a whole country, we can take control of our personal finances. Here are a few ways to help protect what you have:

Get organised

Create a budget so you know what’s coming in and going out every month. Look at your monthly bills and any debts you’re paying off, as well as what’s in your savings and any investments. Take stock of everything to see if there are any ways to make some changes, such as paying off debt faster or cancelling subscriptions you no longer need. By doing this you’ll at least be aware of your situation and feel more in control if the economy does take a turn.

Build up your emergency fund

Regardless of what’s happening in the world, it’s important to try to have an emergency fund. Work now on building up an account with enough cash to cover the essentials for a few months if your income takes a hit. This could give you some valuable peace of mind.

Tackle your debts

Economic downturns bring unpredictability, such as a rise in interest rates – which could mean that if you’re paying interest on any loans, your monthly payments could go up in a big way. So, review your debts, and seek advice if you're not sure in what order to address them. Your largest debt will likely be a mortgage if you have one. Think about contacting a mortgage adviser or broker to see if you can secure a better deal.

Assess your job security

Job security is important during a downturn – because unemployment rates could rise as businesses stop hiring or make redundancies to stay afloat. Evaluate the level of security in your job and career and see if you feel confident staying put. Otherwise, it might be time to look for something with long-term security and stability.

Let your investments manage themselves

When economic weakness is headline news, you could be tempted to sell any investments to protect what you have. It’s common for people to focus on trying to avoid a loss rather than making a gain during worrying economic periods. But financial markets are rising and falling all the time, and if your investments have fallen in value, you’ll lock in that loss if you withdraw your money. By staying invested, your investments may have a chance to recover if the situation improves.

Overall, try not to worry

Some things are out of our control, so try not to panic if conditions in the economy appear to be getting worse. Fear has been shown to lead people to make hasty financial decisions, whether it’s an investment or being lured into a scam. Try to keep level-headed when it comes to your money and always get some expert advice if you’re unsure about anything.

Recommended reading

• Six ways to handle rising mortgage payments
• The first steps to take if you lose your job
• Want to reset your spending habits?

Disclaimer: The Hub is intended as a knowledge portal to provide information on a range of topics, including financial products. Articles may reference products and services that Chase UK does not currently offer. This article is for information only and does not constitute financial advice. Tax treatment depends on your individual circumstances and may be subject to change in the future. We do not offer any tax advice. As with all investing, your capital is at risk. The value of your portfolio can go down as well as up, and you may get back less than you invest.