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There is no getting away from the fact that millions of us are going to feel stressed out by our finances over the next year as the recession takes hold. The good news is that only a small percentage of us will end up in the disastrous position of going bankrupt or having our homes repossessed.
According to experts who have given advice in previous recessions, the difference between keeping afloat and going under can start with something as simple as a change in attitude towards money. "The people who survive a downturn are often those who see an issue before it becomes a crisis and deal with it," says accountant Richard Murphy. "Those unwilling to open their bills and face reality are going to have a hard time."
How to start being a realist
If you cannot bear to look at credit card statements or are accused by family and friends of burying your head in the sand, you are on the road to trouble. "The sooner people seek help, the easier it is to help them," says Frances Walker of the Consumer Credit Counselling Service.
The best way to put realism into practice is to write down your personal budget of cash flows. Writing it down forces you to face the truth.
The end result for most people will be that they realise what they have to cut down on in order to pay the rent or mortgage, council tax, electricity and other bills that land people in big trouble if they do not settle them. Once you know the true scale of the problem, you can start negotiating with your creditors to try to reduce your repayments once you have cut back as much as you can.
Maeve Taylor, 51, has lived through one recession. She began budgeting in 1992 when she was in negative equity, worried about losing her job and very short of cash.
"It made me realise I had to take in a lodger, start saving - even small amounts - and get another job," she says. She has always done budgets since and, although she does not feel well off, is confident that she will get through this recession. For Christmas she gave people £5 presents - "everyone seemed to understand."
Build up a cash buffer
With redundancy figures expected to surge, a lot of us will find ourselves without money coming in. That is the time when your savings could be the final barrier stopping you going bust. A cushion of three times your monthly income is the minimum to aim for, but a bigger sum would be even better in these difficult times, especially if you have a large mortgage to pay off. But if you can only manage £50, that's still much better than nothing.
David Harlow, 57, who is on benefits, had big debt problems which he resolved by selling his house five years ago, but now manages his much-reduced income with precision: "I keep a cash buffer of £100. If I go below it, I live off pan-fried bread and onions for three or four days. That £100 comfort zone is crucial. I feel I've got a bit ahead of the curve."
Pay off the mortgage as soon as you can
This is one of the best things that anyone can do, says Garry Spencer of Worthing-based financial adviser Wilbury. If you are not currently struggling financially, he suggests that people on an interest-only mortgage, especially one without a repayment vehicle in place, should switch to a repayment mortgage.
"That way at least you know your mortgage is going down," he says. He believes that many people who are heading into negative equity territory will save themselves sleepless nights if they can start chipping away at the mortgage sum outstanding.
For people already struggling financially, a temporary switch the other way could help to ease their problem, but you will need to pay off the capital at a later date and not all lenders allow a switch to interest-only any more.
The government is pressing mortgage lenders to be much more sympathetic to anyone in arrears, so the first thing you should do if you find yourself in this situation is to discuss the problem with your lender. The UK's largest mortgage lenders have 10 days left to respond to a proposal from the government that would see a Homeowner Mortgage Support Scheme put in place. Under the scheme, borrowers may be able to take up to a two-year interest repayment holiday, but to be considered they need to have first discussed action based on the lender's existing policy on reducing payments or payment holidays. Borrowers must also have sought independent debt advice.
Reduce other debts and check your insurance
If you do find yourself unable to pay your debts, you can find that the level you owe very quickly spirals as the unpaid interest is added to your outstanding capital. Someone with spiralling debts can feel out of control and thoroughly demoralised. If you have debts - such as credit cards or mortgages - pay off the highest-charging ones first (such as store or credit cards) as they cost you the most to service.
If you take out insurance to protect against redundancy, remember it will not pay out if your company has already warned it might make lay-offs. Be careful that any cover you buy actually covers you. Insurance will be important for people with no savings to pay their mortgage, for instance, if they are laid off.
Diversify your cash deposits and other investments
Since only the first £50,000 is guaranteed with each savings institution (or group of institutions if several banks are in one organisation), cautious savers will want to spread their money about if they own more than this sum. "Put in a maximum of £40,000-45,000 for each organisation," says Colin Jackson of Baronworth Investment Services, explaining that people need to leave some headroom for interest as the £50,000 limit covers capital and interest together. "Everybody is vulnerable now."
This recession is the first in which large numbers of people have equity savings and need to think about how they handle them. Although some people sold out earlier this year, few are selling shares now. Some may, however, shift their shareholdings to try to limit further losses. "Try to pick funds and sectors that people have to use whatever the economic environment - pharmaceuticals, food retailers and oil companies, for instance," says Ben Yearsley of Hargreaves Lansdown, addressing more cautious investors.
And don't keep investments that you do not like or trust. You might not earn much interest with National Savings & Investments, but at least you will feel secure about where your money is.
Protect your income stream
If you think you could lose your job, start researching other possibilities now. If you are freelance, make sure people pay you on time and seek new clients if yours are looking shaky. Some markets will dry up during a recession and you could end up like someone trying to sell Easter eggs at Christmas if you persist in them. "Be open-minded," says Richard Murphy. "For instance, if you were a sales adviser, you could have the skills to be a debt counsellor." He has seen people save themselves from disaster by making such big changes in their career.
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