Prices are rising, and the cost of living crisis is all over the news. While this suggests things will become financially tougher over the coming years, this isn’t definite. Economic uncertainty means that we aren’t sure of what will happen economically in the future. Recent events, including the covid pandemic and the war in Ukraine, have contributed to increasing unpredictability.
As frightening as this uncertainty can seem, we mustn’t let fear of potential economic outcomes overwhelm us, but also critical that we take this time to prepare for what could happen. Economic uncertainty has hit the UK before, and it will happen again. Managing your finances can ensure you get through these uncertain times with as little stress and difficulty as possible.
The best things to do to prepare for possible economic uncertainty.
While unpredictable economic times are worrying, there are plenty of things you can do to improve your situation.
Reduce spending where you can.
Particularly see if there is any large or frequent spending you can minimize or cut out. Many of us spend more than we need, and it doesn’t hurt to see if there are things you can trim.
You might not have to cut too many things right now, but it’s still good to consider where you can save money. That way, you’ll know where to start if times are tough.
Build your savings and emergency funds.
Emergencies happen. Unfortunately, we can’t always predict and specifically prepare for when something happens. You can, however, ensure you have something to fall back on and cushion your fall.
Ideally, you want to have about three months of expenses in savings. This is just a rough estimate and changes from person to person. For example, someone with non-negotiable obligations (like mortgage payments or childcare) may want to work towards 6 months of emergency funds or more. Start putting away a little at a time, wherever you reasonably can. It might start small, but the more you put away and build it into your money habits, the more you’ll save.
Financial literacy could save you. A solid understanding of your finances, and money matters in general, will enable you to create better financial plans.
You must create a realistic budget. Otherwise, the chances of you sticking to it will drastically reduce. Consider using the 50/30/20 rule in which you put half your income towards needs, 30% for your wants, and 20% into savings and investments.
One of the reasons the 50/30/20 method is so widely recommended is that it allocates a decent (and reasonable) portion of money for you to spend as you please, without feeling guilty or like you are constantly depriving yourself. Things like Budgeting apps can assist with creating a budget and sticking to it.
Automating bills and savings deposits means you don’t have to think or stress about sorting them monthly. You can easily avoid late fees if your payments are automated, meaning less wasted money. It also gives you less time to be tempted into spending the money elsewhere.
Look for low-cost fun.
You don’t have to deny yourself every bit of fun or pleasure in order to be financially smart. Sometimes it’s much smarter to choose affordable activities that allow you to enjoy yourself without straining your wallet.
Know your assets.
This can mean big things, like houses or cars, but it can also include much smaller non-monetary assets like credit card rewards or even just extra food, which you could use to reduce your shopping bill.
Be open with your financial goals.
You don’t have to tell everyone, of course, but you should be on the same page as those to whom you are financially tied. For instance, if you and your partner share an account, you’ll need to have conversations and agree on your financial plans.
Consider income alternatives.
This may mean diversifying or brushing up on skills or making alternate investments. Ideally, you want to have more than one potential source of income. This was a painful lesson learnt by those who lost their jobs during the Covid pandemic. Over 11 million jobs were furloughed, and though unemployment in the UK has dropped, it remains 500,000 more than in March 2020.
Things to avoid in case of economic uncertainty.
You can do things to help yourself, but there are also mistakes you can make that may negatively affect you. Here’s what to avoid.
Don’t wait to use your work perks.
If your employer offers perks, now is the time to use them. That means collecting reimbursements and scheduling procedures covered by work insurances now rather than saving them for later. Ultimately economic uncertainty also usually means layoffs. There’s no point trying to save benefits to use later when you don’t know if you’ll actually be able to access them further down the line.
Don’t delay dealing with your debts.
Effective debt management can transform your finances. Most debts come with interest rates, meaning the longer you have them, the more you owe. Debt also often means one more bill to pay every month, which is the last thing anyone needs during economic uncertainty.
Consider ways to reduce your interest rates. For example, you could switch one credit card debt to another card that has a lower interest rate.
Don’t put off maintenance work.
Sometimes it’s tempting to save a little extra this month by putting off maintenance work. However, this could end up leaving you worse off. Regular checkups and minor fixes are much cheaper than the much bigger issues they can grow into. Whether it’s health, car, home, or anything else, doing a little at a time can prevent big expenses and stressful situations.
Keep a positive mindset.
Take a deep breath. All this talk of economic uncertainty can be unnerving, but you’re already in a better position than many if you are thinking about your current and future finances.
You’ll hopefully be able to save yourself from future stress by thinking and beginning your financial planning now. If you can consider your future, you’ll be in a much better position. Things like retirement are vital in any situation, especially in economic uncertainty.