This year will be the toughest since at least the 1990s recession. But for those who keep their jobs, things will get steadily better.
Most people are still feeling the effects of the burst of inflation we experienced in 2007-08. Because we had to spend so much more of our income on petrol, domestic energy, food and mortgage repayments, we had less to spend on everything else.
Many people made up the shortfall by borrowing more. Now we all know we have to cut back our debts.
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Things can only get better
The good news is that if you are in work, the situation will steadily improve throughout 2009. This is because:
- Petrol prices have already fallen by more than a third from their peak and will fall further
- Domestic energy prices should fall by at least a third next year thanks to lower wholesale prices
- Food prices have stopped rising and in many cases will fall in 2009
- Mortgage interest rates will fall further as government moves to unfreeze the credit markets start to take effect
- Retail price inflation will fall sharply towards zero by next summer
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A significant improvement
Add these factors together and a household with a car and a mortgage will probably see an improvement of 7-10% in net income in 2009, even before allowing for the tax cuts announced in the Pre-Budget Report.
So if your personal debt level is too high, you should be in a position to start to pay some off. And if you have cut your savings in the past year, you should also take the opportunity to build them up again.
Financial priority checklist:
- Review your monthly budget and cut out items of spending you don’t really need and can’t really afford. - Red-line items are eating out, costly TV subscriptions, gym memberships, clothes, gadgets, sandwich-shop lunches. Trade down wherever you can.
- Review all your major bills: gas and electricity, broadband, telephone and mobile, mortgage, credit card, house/car/life/income protection insurances. Get comparative costs for all of them and switch to save.
- If you’re likely to fall into arrears on your mortgage, approach your lender immediately. Draw up a revised monthly budget showing how you plan to limit the shortfall, which should enable you to negotiate deferral of some of the repayments.
- Freeze your credit card debts. If necessary cut up the cards. Budget for higher monthly repayments to pay off balances where you’re paying interest. If your credit status is good, switch balances to a 0% offer and aim to pay off the balance before the no-interest period ends.
If you need to really control your spending, stop using credit or debit cards and spend only cash you withdraw from cash machines.
If you are in serious financial trouble, get financial counselling now. The Citizens Advice Bureau service is excellent and free.
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Look ahead
Tough times are also times of opportunity. The employment market will be tight next year, but if you have a reasonably secure job, think about improving your qualifications, so that when an upturn comes, you’ll be able to apply for higher-paid jobs.
If you’re a potential first-time buyer, 2009 could mark a low point in the housing market. A good rule of thumb is that to be a real bargain, a property should be priced at about 14 times the annual rental – that means a yield to an investor of 7% (assume 16 times in London).
The stock market will very likely start to recover long before the economy does. But it will probably be many years before there’s a major upswing in share prices. This is good news if you are saving for retirement. Start a regular savings plan using a fund supermarket and start accumulating cheap shares.
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