How to prepare for the next financial crisis

• Alex Hartley
• 24th January, 2019
• Money & Finance

In early December 2018 the International Monetary Fund (IMF) indicated that a new financial storm was brewing. It said that, not only were we on the cusp of yet another financial crisis, but that it was highly likely that the financial systems of the world would be ill prepared to deal with it. Such a crisis could be triggered by any one or more of a number of perhaps local events. For instance the UK, the world’s fifth largest economy, crashing out of the EU without a proper deal could be enough to cause global ripples or may be even an economic tsunami. All of us are connected to the financial systems that would be impacted by such a crisis, whether via savings, a pension or the value of a home. So, what can you do to prepare for the worst and try to protect the assets that you have?

Work harder on boosting your savings

Having money put aside for a financial crisis is the best way to give yourself a buffer. For most people, losing a job is likely to be one of the worst consequences of a financial crash but if there are savings in the bank this won’t hit you quite as hard. Enough to cover three to six months worth of expenses should provide the buffer that you need.

Reduce your outgoings

If there’s a financial crisis then money is going to have to go further for everyone. So, it makes sense to cut back now so that you’re in the right habit. Plus, the less you spend now, the more you’ll have set aside to add to that rainy day fund.

Spread your savings out to reduce risk

As we have seen in recent years, banks can, and do, go under when there is a financial crash. So, it makes sense to spread your savings out to reduce the risk. Remember that multiple banks may be under the same ownership, such as Lloyds and Halifax, which both come under the umbrella of the Lloyds Banking Group. This will also be relevant if you need to seek compensation if your savings are lost. You can get up to £85,000 compensation for each financial institution you have savings with from the UK’s Financial Services Compensation Scheme.

Be on top of your household budget

One of the main reasons people get into trouble with money, whether during a financial crisis or not, is as a result of an inability to budget. What are your weekly and monthly outgoings? How much would you need to cover three or six months without work? What is your regular monthly income? All of this information will be crucial when it comes to staying in control of your cash no matter what happens to the economy.

Reevaluate your pension

This will depend on where you are in life. If you’re relatively young then any negative change to your pension can still be made up before you reach pensionable age. However, if you’re close to retirement, a financial crash now could leave you with no time to make up any losses as a result of such a disaster. So, for many people, it makes sense to change how pensions are invested to reduce risk – this usually means switching to safer investments, such as bonds and cash, as opposed to equities.

Don’t overpay on your home

If you’re a homeowner – or you’re buying right now – getting the best possible deal is essential. House prices are predicted to plateau in 2019 and a 2% drop is forecast for London. So, it might be better to wait to buy until the mid-end of the year when sellers will be keener and prices may be lower. Take advantage of the cuts to stamp duty for first time buyers and negotiate hard on associated costs to make sure your expenses stay low. If you’re remortgaging you might want to consider a longer term deal (e.g. five years). This will give you as much security as possible when it comes to your repayments even if there are widespread financial troubles.

Make sure your debt is affordable

No one knows what will happen to interest rates over the next few years but they could go up. If that happens anyone with debt will become vulnerable. So, it’s crucial to start paying off as much of what you owe as possible right now. If that’s not an option then switch to a more affordable repayment plan that will help to keep the costs of your debt low.

Identify extra income opportunities

Maybe it’s time to fix up the spare room so you can rent it out. Or you may have always wanted to sell the paintings you do at the weekend. Monetising your skills and talents to help give you other options if the worst occurs is a great way to prepare for a financial storm.

No one knows what’s going to happen to the world economy in the coming months and years but taking these steps can at least help you to be prepared. And 2019 looks like it could be more volatile than many recent years. As the cub scouts say, “be prepared”.

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