How to budget for a recession

Is the UK heading for a recession in 2022? Some have no doubt that we’re heading for rough economic waters. Others have said it will be worse and that a depression is brewing on the horizon. Here are a few tips on how to budget for a recession or depression.

It’s hardly surprising given the evidence all around us. We’ve spent nearly two years emptying the Treasury to pay for the responses to the pandemic. Leaving aside for a moment the enormous waste of some of that money (37 billion on Track & Trace, a few billion lost in fraud etc), the fact is that the cupboard is bare and the tax payers are the only ones who can refill it.

Then there’s the energy prices. They’ve shot up and, like millions of others my household bill has gone up by a huge leap already. Energy prices don’t just affect domestic bills. They also mean the costs of goods and manufacturing go up as the factories and warehouses see similar price rises to their bills. They pass on those costs to us, the consumers, by raising the prices of their goods.

So it seems almost certain that we’re going to have to pay more tax (directly or indirectly, in one form or another), higher domestic bills for utilities, and higher prices for everything we use in the house and garden.

And then there are the interest rates. You know how it works; the boss tells you you’re lucky to get that 1.5% pay rise but if the raise doesn’t match or exceed the rate of inflation then you’re no better or worse off than the year before.

How to budget for a recession (or a depression) – now

With that kind of storm on the horizon now is the time to start budgeting. Don’t wait until the wind picks up before you start drawing in your sails.

How to keep your spending under control

The first thing we need to do when faced with any kind of financial pressure is to examine your spending and look for ways to cut back on unecessary expenditure. A dollar saved is a dollar earned as the old saying goes. You may not be able to earn more immediately but you could at least spend less.

Closely inspecting your finances can, for some, be a sobering exercise but it’s vital if you’re to avoid allowing a sub-optimal situation deteriorate into something far worse. It’s always a good time to sit down at your desk or kitchen table and to audit your finances to ensure you budget correctly for the times ahead.

There’s an endless amount of free advice about this process online and some of it goes into a lot of detail but the process is really not that complicated.

The Household Budget

What you need to do is to divide your household budget and expenses into three broad categories. These are:

1. Fixed and essential expenses
2. Variable expenses
3. Non essential expenses

Fixed and Essential Expenses

The first category are things like rent or mortgage. The fixed amount you have to pay each month keep a roof over your head. Unless you’re about to move home or change your mortgage this is likely to be a fixed expense although of course it could increase if interest rates rise. What won’t change though is the fact that it’s essential.

Variable Expenses

The next category is all those essential or important utilities to keep your home warm and comfortable; gas, electric, water, etc. While these are essential some of the bills can be reduced by economising on lighting and heating in the home for example. Don’t heat rooms that aren’t in use. Turn off lights and any household appliances until you’re sure you need to use them.

This category includes food. This is often a big expense for households and there are plenty of economies that can be made. Learning to cook basic meals with fresh ingredients is probably the most important way to save money in the kitchen. We spend fortunes on takeaways and processed TV dinners. It’s not only an expensive way to eat but also adds to our general poor health with the knock-on effect of an obesity crisis that burdens the NHS.

The second category also includes any credit card debt. Ideally you should pay off this debt in full each month in order to avoid the interest but all too often it builds up and people pay some but not all of it. Others pay only the minimum amount either because that’s all they can afford or because they’re not paying close attention to it even though they could afford to pay a lot more.

If your credit card debt is getting out of control then it may be time to consolidate the debts (obviously this only applies if you have two or more cards) so that you only pay one fixed fee per month. Again, there’s lot of free advice about this online and if this is the situation you find yourself in then make use of what tips are available.

Here is an example of the kind of advice that’s available. It’s pretty easy to follow and makes a lot of sense.

Non Essential Expenses

This is the category that tends to cause the most unnecessary expenditure. There are all kinds of things that can be either reduced, suspended, or cancelled altogether. You may think some of these are essential to you and that giving them up or just cutting back will be a wrench or a step too far, but if one day you may be forced to make a choice between these and the ones in the first two categories.

• Subscriptions. These can be the TV package, magazines, journals, newspapers etc. Do you read them all? Some could be cancelled. Others could be suspended for 3, 6, or 12 months. With some you may find that you’re offered a better deal when you call or email to say you want to cancel the subscription.
• Drink & smoke. The booze, cigarettes/vaping etc is an obvious area in which to cut back or cut out. You can at least confine the booze to weekends, drink less, and shop around for the cheapest.
• Holidays. This is a tricky one because there is a case for them being a kind of preventative medicine, particularly when it comes to mental health. So perhaps it’s not a case of cutting them out but budgeting wisely and only going where you can afford to go.
• Christmas and birthdays. Many people tend to a bit crazy in the run up to Christmas spending as if there’s no tomorrow (“Because it’s Christmas!“) and then waking up to a credit card hangover in January. Don’t do it. Save throughout the year and only spend what you can really afford. The same goes for birthdays. Your partner or your children will still love you (and perhaps love you more) if you economise in order to get you and them out of a financial hole.

When it comes to financial planning avoidance is not an option. Make sure you’re in control of your household budget and you’ll reap the rewards when the storm has past and we’re back in the fair winds and bright skies.