By Daniel Hough

 

For the first time since the 1980s, inflation has reached double digits in the UK. There is little respite on the horizon either, with predictions from Goldman Sachs suggesting it could reach north of 20 per cent in January next year. As interest rates continue to rise amid a mixed bag of economic indicators, all commentators are suggesting we are likely to enter into a recession.

The combination of a downturn and high levels of inflation is what’s known in economic circles as "stagflation" – periods characterised by rising costs, high unemployment, and stagnant growth. The situation is causing headaches for many thinking about how best to manage their personal finances and, while we would always recommend taking professional advice where possible, there are some steps you can take to prepare.

Firstly, make a budget. Living within your means is important in any circumstances, but more so during an economic downturn.

While it can be a boring task, understanding your income and expenses and having a clear plan should help alleviate some of the stress that money worries can cause. A review of discretionary spending, such as streaming services, meal kits, or subscriptions, might highlight some expenses that could be cut.

However, there are other services that while tempting to cancel or switch for cheaper alternatives – such as insurance policies – could cost you more over the long term. For example, you will likely pay a higher premium to restart life insurance cover at a later age, or you may lose out on any no-claims discount accrued with a car insurance policy.

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Secondly, if you can, fix your mortgage rate for as long as possible. Anyone on a variable-rate mortgage will already be feeling the pain, but homeowners on fixed rates that are due to expire will also need to prepare themselves.

Variable rate payers may want to look at fixing before there are any more changes to the base rate, and those approaching the end of a fixed rate term could also consider breaking their deal early to secure a new fixed rate for the next three to five years.

We always advise our clients to keep enough cash for at least six months’ worth of expenses and, in times of economic uncertainty, it might be wise to increase that further. That might be difficult for many households during a cost-of-living crisis, but if you are fortunate enough to have more than six months’ cash, we would also suggest investing what you can.

Interest rates on most bank accounts are still well below the Bank of England’s base rate and way off inflation, whereas a balanced portfolio of equities has historically proven to be an effective way of maintaining the long-term value of wealth.

For those who already hold investments, we would recommend staying in the market, but potentially reassessing your level of risk.

Stock markets have been very volatile in the year to date, which may have spooked some investors who may now be considering selling up. However, one of the worst times to sell your stocks is after markets fall.

Many people are nursing losses from the sell-off of high growth, but also higher risk, technology companies that have done very well over the last decade. If personal circumstances allow, you should remain invested but reassess your attitude to risk and see if a rebalancing might be in order on the back of recent market shifts.

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Finally, we would recommend thinking ahead and maintaining your pension contributions.

If money is tight, it might seem tempting to decrease monthly contributions, but this could be detrimental to your long-term financial plans – particularly when you consider the effects of compounding. For instance, missing out on a contribution of £1,000 today could be the equivalent of £7,358.42 in 40 years’ time, based on an annual growth rate of 5% after charges.

Some say that recessions are part and parcel of the economic cycle, but we cannot ignore the fact that stagflation is likely to have a significant impact on many people. We have a new Prime Minister in place, which at least provides a direction of travel, but there are still plenty of economic uncertainties out there – particularly with ongoing geopolitical tension and supply chain disruptions.

While all of that may seem overwhelming, there are still steps people can take to mitigate some of the financial pressures that will affect us all in the months ahead – and it’s arguably as important as it has ever been to make those changes now.

Daniel Hough is a financial planner at wealth manager Brewin Dolphin.