Clear your debt, get saving and prepare to meet thy doom

Recession-proofing: Matthew West sees how you can protect your finances if the gloom-mongers are right
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The Independent Online

Most of us worry only occasionally about what we would do if we lost our job and where we would find the money to pay the bills.

But given the stock market turmoil of the past month, and warnings about an impending recession, we might now be getting a bit more concerned. So is there anything we can do to copper-bottom our finances?

The short answer, says Tom McPhail at independent financial adviser (IFA) Hargreaves Lansdown, is no. "It is virtually impossible to make yourself immune from the effects of a recession." But, he adds, you can live with it. "The trick is to protect yourself as much as possible."

Of course, how capable you are of withstanding a downturn depends partly on your personal circumstances. For instance, those in their 20s living in rented accommodation may be less vulnerable than a couple with kids and a mortgage to pay, as they have fewer financial commitments. Protecting yourself is largely a function of what you have to protect in the first place.

But regardless of personal circumstances, Mr McPhail says the first thing to do is draw up a budget and focus on clearing debt.

Julia Harris, an analyst at comparison website www. moneyfacts.co.uk, advises clearing your credit card debt first, by transferring it to a card that offers an interest-free period for balance transfers. "Virgin Money offers 0 per cent for 15 months. So you could transfer all your money on to that and then cut the card up immediately along with the others. Then you can start sorting that debt out. But the balance-transfer fee is 2.98 per cent," she adds.

If you are worried about how your investments are performing because of the recent market upheaval, the advice is not to panic – shares are for the long term.

"The last thing you should do is react to what is happening on the stock market," says Anna Bowes at IFA AWD Chase de Vere. "If you do not have a balanced mix of cash, shares and property then, yes, you should look at that. But put money into asset classes that you don't have rather than taking money out of the ones where you're already invested."

Ms Bowes also advises people to build up a savings cushion equivalent to three months' salary. "For many families, the worst-case scenario is what if the main breadwinner gets ill for any length of time? So it's about sitting down and asking, 'could we cope?' "

Ms Harris points out that as a result of the credit crunch, most lenders are trying to attract cash from savers by offering high interest rates. But be careful, she adds, when picking an account. "Fixed-rate bonds, for example, are only advisable if you have money you can put away for some time. Equally, an instant savings account might limit the amount you can put in." For example, Alliance & Leicester offers a mouth-watering 12 per cent but savers can pay in only £250 a month.

But what if you are one of the 1.4 million homeowners due to come off a cheap fixed-rate mortgage this year? How can you avoid the "payment shock" caused by higher interest rates? Jonathan Burridge, managing director of Quantum Mortgage Brokers, says those opting for a tracker mortgage – which moves in line with the Bank of England base rate – could help minimise the pain.

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