How to prepare for the next financial crisis

David Lipton, the First Deputy Managing Director at the International Monetary Fund, recently voiced concerns that the current period of synchronised and sustained global growth will soon come to an end, setting the stage for another global downturn. Against the backdrop of the US-China trade war, the chaos of Brexit and rising global debt, we may be in store for another financial crisis. Some experts predict that this may come as soon as 2020. While another financial crisis is by no means guaranteed, it is always useful to know how to prepare for one. This isn’t exactly the nicest thought to start the new year with, but knowing how to get your personal finances in order before crisis hits is essential. Here are some tips to keep in mind if ever the worst does happen.

Pensions, ISAs and other Investment Products

  • Younger people: As for your pension, it is a long time until retirement and so any shocks in the market over the short-term will likely disappear in the future when the markets return to normal conditions. If you have investment products where you are likely to need the money in the short-term, you may want to consider reallocating some of your investments to lower-risk products that are less likely to fall in value. Be careful with stocks and shares if you cannot afford to lose much, as predicting market trends is both difficult and risky, especially during hard economic times.
  • Middle-aged people: In the event of a financial crisis, stock markets will likely be quite volatile. To reduce the risk of your investment, you may wish to shift some of your money away from shares and towards gilts and corporate bonds. These are lower risk investments, however during a recession when many businesses go bust, returns are not necessarily guaranteed. It is also important to note that during times of financial stress, there will likely be high inflation and low interest rates. This would mean the real return on investment in gilts and bonds will be much lower, or even negative. Whilst there is potential to lose a lot of money in stocks and shares, it may be worth waiting until the markets settle down again.
  • Those nearing retirement: As you move towards retirement, taking a large hit to the value of your savings and investments can be very detrimental. If you have invested heavily in shares, your pension pot is vulnerable to sharp declines in value during financial crises. If this does happen, you may not have a lot of time to make that money back, leaving you in an insecure financial position during retirement. It may be worth increasing your holdings in cash or gilts and bonds. Whilst these are vulnerable to high inflation and low interest rates, they are usually much less risky.

Emergency Savings

Having an emergency savings net is vital in case you lose your job. The risk of unemployment increases hugely during economic downturns. It may also take a long time to find a new job. As such, having a large ‘safety pot’ can help you get by and cover expenses whilst looking for a new job. Saving money may often seem a difficult task, but there are many excellent ways to earn money on the side. This money can contribute towards emergency savings. It is also worthwhile remembering that the benefits of having that safety net during a crisis usually outweigh the costs of saving small amounts each week.

Reducing Debt

Having excessive amounts of debt can be very risky. Higher interest rates paired with falling real incomes during a financial crisis can make it very difficult to make the repayments. It is important to try and have as little debt as possible before a crisis hits, or you could find yourself with some deep financial problems. Lowering costs by leading a simpler lifestyle, as well as earning some extra money on the side, can help you repay your debts faster. By reducing credit card debt for example, not only will you be more financially secure during the hard times, but you will free up more money each week by having to pay less interest. In addition, make sure you focus on dealing with the higher-interest, short-term debt first, as this will have the biggest impact on your finances if not repaid.

This guide is by no means an exhaustive or definitive explanation of how to prepare for a financial crisis, but provides a general idea of what you could do to better your chances of survival. It is again important to note that an imminent financial crisis is not a certainty. However, knowing how to prepare just in case one ever does happen might be useful one day. In this regard, keeping an eye on economics related news may also be useful. This will help you have more of an idea of if and when an economic downturn may occur.

Please be aware that it is just about impossible to predict exactly what will happen during the next financial crisis, and when it will occur, and so it is important that you consider all your options carefully and make the decision that you feel is best for your specific circumstances. It may be worth consulting a financial adviser for help.