Protecting yourself against a recession

29 April 2008

It is a good time to batten down the hatches, pay off debt, make savings and prepare for the worst if you`re of a nervous disposition.

There is a one in three chance of the economy sinking into recession over the next two years, according to investment bank Lehman Brothers.

While many people may not currently be experiencing debt problems, getting personal finances into shape now - in preparation for potentially troubled times - may not be a bad thing.

The recent credit crunch has stirred the financial and property markets up in a way that has not happened since the early 1990s and, as a result, many people are not prepared for the outcome.

A recent study by Fool found that 22 per cent of working Britons - those aged between 18 and 34 - had never been through a recession before and were worried about the consequences.

David Kuo, head of personal finance at the company, said: "Young people who have not experienced previous recessions are understandably worried about the property market.

"They include both those who have just bought their first house and those who want to get on the ladder, but whose hopes are being dashed by over-cautious lenders."

The talk of a recession has already had an impact on the housing market. The Bank of England`s £50 billion liquidity boost earlier this month is a sign that things are not quite right at the moment.

Slowing property prices, combined with increasing mortgage repayments and large personal debts, could force many homeowners to miss important bills, potentially leading to repossession of property.

Liberal Democrat shadow Communities and Local Government secretary Julia Goldsworthy claimed that as many as 60,000 families may be at risk of repossession if recession hits.

"As living costs rise, and the credit crunch starts to bite, families are forced to cut back on essentials in order to keep a roof over their heads."

So how do you prepare for something that could, potentially, be so catastrophic?

If you`re thinking of moving home or changing job you might want to carefully weigh up the pros and cons. For example, it could be a bad time to take on a larger mortgage.

Clearing all debts now may help prepare for rockier times ahead, while delaying potential big purchases - such as a car - could free up some extra money to pay off debts or to line a savings account.

How long a recession lasts for is open to much debate. It could be a year, two years or five.

Tony Tan, of the Government of Singapore Investment Corporation, suggested that any recession could be worse than that of the 1970s, lasting for a number of years.

"We could be facing a recession which is longer, deeper and wider than any recession that we have encountered in the last 30 years," he said.

Nevertheless, at the moment, the UK is not in a recession. In fact, as MoneyExpert`s Sean Gardner points out: "There is however a risk that we could talk ourselves into a recession by panicking."

Better be safe than sorry though.

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Gregory Pennington are founder members of DEMSA (Debt Managers Standards Association).

DEMSA are the first trade body within the finance industry to successfully secure approval for its code of practice under the OFT Consumer Codes Approval Scheme (CCAS).