How to prepare for the next financial storm

By UK CreditCards.com

Just when it felt like we were headed toward recovery, the warnings started to arrive.

financial-troubles-relationships Retail figures have suggested that the British economy has started to contract and experts, including the Bank of England's Paul Fisher, have warned that there is a "significance chance" that the UK will slip back into recession.

Consumers were inadequately prepared for the Great Recession of 2008 to 2009. However, this time around, there has been plenty of warning, with some economists predicting that the second dip, if it occurs, will last longer and be more serious.

Here are some concrete steps that you can take to start preparing ahead of time.

1. Save, save, save.
It might seem obvious, but saving money you have now whilst things are financially comfortable could protect you at the deepest points of the recession. Although the Bank of England base rate is still at its historic low of 0.5% and inflation hovers around 4.5% according to the Consumer Price Indices, saving for the future isn't impossible. It just takes a little ingenuity and grit.

If you do not have spare funds right now, but still want to ensure that you have a financial security blanket if a second recession hits, look for ways to cut down on your current outgoings.

For example, if you rent your property and have been in the same place for some time, your landlord might be willing to reduce your rent slightly. Or perhaps you can reduce how often you eat out each week. Getting rid of expensive long-term contracts is also an excellent place to start. Compare prices online to make sure you are always getting the best value for money.

2. Generate multiple sources of income.
Most of us only have one major source of income and that is our job. However, if we were to be made redundant in the midst of a financial crisis, the majority of us would struggle to meet the cost of our outgoings.

That's why it's a good idea now to look for new ways to bring in cash. Generating additional sources of income can provide a valuable financial buffer and help prevent a crisis. Possible ways to generate extra cash include freelancing, investing or taking a second job.

3. Reduce your interest payments.
If you have outstanding balances on your credit cards, look for ways to reduce your debts so you aren't spending all your extra cash on interest payments.

There are a number of ways to do this. For example:

  • Clear your debts. Pay off the balance in full as soon as possible and repay any further charges in full each month. This will prevent you from paying for any further interest (assuming that you have a 56-day interest-free period on your purchases). Of course, this requires that you have the funds to repay the outstanding debt in full.
  • Transfer your balance to an interest-free credit card. If you have a high balance that you can not pay in one lump sum, but could repay over a longer period, consider transferring your balance to a 0% balance transfer credit card. Remember to compare the other features of the interest-free cards and check the APR after the introductory period.
  • Don't just pay the minimum payment. Your credit card bill will show you the minimum payment due each month. However, just paying this amount means that it will take you longer and cost you much more to repay the debt. If you have a tight budget, try adding £10 or £20 to your minimum payment each month to save more long-term.

4. Limit your debt by switching to a prepaid card.
Getting into additional debt at a time when senior policymakers are warning of a second recession is not a good idea. If you have a tendency to overspend, having extra credit available may tempt you to buy more than you can afford.

One way to avoid debt spiralling out of control is to switch to prepaid credit cards until you get your finances in order. Prepaid cards do not offer credit facilities and cannot be used unless they are pre-loaded with cash.

However, don't forget that some prepaid cards come loaded with fees. Compare cards carefully before you choose a new card. 

See related: Consumers expect inflation to remain high in 2012; Bankers expect credit problems to worsen 

Published: 29 December 2011