Preparing Your Money For A Rainy Day

Posted by John Adam on November 19


Brexit, a rumbling trade war between the USA and China that may or may not be resolved, geopolitical turmoil around the world, signs an economic slowdown might be afoot…. Anyone who regularly watches or reads the news could be forgiven to arriving at the conclusion that we’re all going to hell in a hand basket. Or at the very least we should start battening down the hatches in preparation for the next big recession.

But before starting to stock up on tinned goods or flying into a panic about how you’ll be able to keep buying the good dog food when the country falls into economic ruin, take a deep breath. For all the talk that the next recession might be on our doorstep, looming like the Grim Reaper of wealth and prosperity, it is just as likely that it isn’t. Economic analysts and the media don’t have a great record when it comes to forecasting recessions. Even the best economists will admit that all they can really do is make a more informed guess about how likely different scenarios might be.

But even if a recession is forecast as 70% likely to hit at some point over the next couple of years, that still means there’s a good chance it won’t. And what’s even harder to forecast is how serious or long term any eventual downturn might be. The reality is, nobody really knows how the UK and international economies will do over the coming months and years. What we do know is that history shows that the modern capitalist economy, on national, regional and international levels, moves in cycles. Or, at least, that’s always been the case so far.

We can be pretty certain that sooner or later we will experience another recession. It could be a mild one or a more serious one. We’ve also seen that recessions, even the most serious like the financial crisis of 2007/08, turn and things get better again. And recessions don’t affect everyone equally. They can pass almost unnoticed by those who don’t lose their jobs or see their business fail. And the reality is, in a country like the UK that is still a large majority of people. Unemployment peaked after the last recession in 2011 when it was 8%. It’s currently at close to record low of 3.8%. So around 4 in 100 people more were unemployed during the worst period in recent history. And that was the biggest recession to hit the developed world since the Great Depression in the 1930s.

That’s not to understate the affect a recession can have on some individuals, especially those who do lose their jobs. But it does put things into perspective and show that media rumblings a new recession might not be far away should not lead to panic.

But the fact that recessions do, inevitably, tend to hit economies once in a while as a normal part of the economic cycle, does mean it makes sense to be financially prepared for a rainy day. And even setting aside the possibility of a recession, that still just makes good sense. Unexpected things happen, companies downsize or fail and it’s not always predictable those things are coming. Often it’s not for many affected.


Save For A ‘Rainy Day’ Fund

But what does make a big difference to the fall-out of an unwelcome and unexpected change in financial situation or expenses that need to be met is how financially prepared for a rainy day those in the wrong place at the wrong time are. A solid rainy day fund can take a huge amount of the stress out of such situations. And, arguably even more importantly, take away the stress of worrying about what might happen outside of our control.

Personal finance experts recommend everyone does their best to set aside enough cash to cover at 3-6 months of basic expenses. That might sound like a lot but doesn’t necessarily have to be a huge challenge if done through manageable, regular monthly sums put aside into a savings account. Over a few years, less if a real effort is made to cut back on any expenses that aren’t ‘necessary’, building up the recommended financial moat should be achievable for most.

Assess Your Job Security

If you don’t yet have a rainy day fund, or you’re not comfortable with its size, it’s never too late to start saving. You can also ask yourself a few simple questions to help decide how much you want to start saving each month. A good first one is how secure your job is likely to be in the event of a recession? Some sectors and jobs tend to be more effected than others by economic cycles. Jobs in finance, for example, can be more vulnerable during a recession. Or some kinds of manufacturing.

On the other hand, if you work for the NHS, are a teacher or provide some other kind of crucial social service then you would probably be unlikely to lose your job. How much did the last recession affect your sector and people in your or a similar role? That should give you some indication of how secure you will be during the next.

Keep A Financial Moat Between Your Monthly Outgoings and Incomings

Another piece of good financial housekeeping, valid in any circumstances, is to make sure any debt you have is at a manageable level. If even a smallish change to your financial situation would mean you will have difficulties making your monthly obligations, especially debt, you are probably spending too much anyway. You should make sure you leave yourself a buffer between your outgoings and incomings so you don’t run into trouble if your income were to temporarily drop or an unexpected expense crops up.

Keeping a financial moat between your monthly income and expenses will not only mean you can use that difference to save into your rainy day fund. It also means you have some wiggle room in unexpectedly changed financial circumstances.

If you stick to those three guidelines, even when no one is talking about recessions, you should have little to lose any sleep over if and when the unexpected or unfortunate does rear its head.

Written by John Adam

John has almost 10 years of experience as a writer and editor on consumer finance and investment topics. An entrepreneur, he has one successful exit behind him and currently writes and consults freelance while enthusiastically pursuing hobbies he's not very good at such as football, squash and raising a small child.

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