If the UK is leaving the European Union, what – if anything – might be the knock-on effect on the money in your pocket, and on your long-term financial plans?
So we know that Brexit means Brexit – even if that’s just about all we know at this point. But what does Brexit mean for your money? Specifically, should you plan your finances any differently to prepare for Britain coming out of the EU at some point in the next 2-3 years? What effects, if any, will this have on you and your money?
Even for a professional adviser, it is a very good question. At this stage, practically the only thing we do know about Brexit is that the Government is determined to trigger Article 50 by the end of March. That said, working with unknown factors is nothing new – when I construct an investment portfolio, I have to consider a wide range of future scenarios and the possible impacts of each one. So the same approach can be applied to one’s general finances. Without knowing what Brexit will actually look like, we can plan contingencies that will help shield in the event that things get really bad.
Brexit – the basic approach
If I were to make my own predictions for Brexit, they would be that life will become a little more expensive for all of us – indeed, you may already have noticed this in rising prices. I would also be a little concerned about economic growth, which could translate into more cuts from the Government as they seek to balance the books.
That said, I’m not going to deviate too much on how to run your money post-Brexit, compared to my usual approach. The fundamental principles remain the same. If you have sound financial foundations and you get the basics right, then you can worry a little less about specific events (be it Brexit or a banking crisis) and stick to your longer-term plans.
Here are a few tips on how to follow those basic principles.
The top priority for everyone should be a spending plan. Work out all your bills and regular fixed costs and see how much money is left over each month. If you can schedule them for early in the month, do so; otherwise, just consider than money spent in advance. Likewise, consider expenditure like holidays and Christmas up-front and budget for them – these shouldn’t catch you by surprise.
Then decide what to do with what you have left. Can you pay down debts? Save it? Put some away as a longer-term investment? The rule of thumb is: once you know what you must spend, you can decide what you could save.
With Brexit effects being felt already, keep a closer eye on your weekly shop and other purchases. I have noticed that our grocery bill has risen by about £10-15 per week, while our energy bills have risen by £40 per month due to the weaker pound and oil prices. Factor in rising petrol costs, and you may already be around £60-70 a week worse off. So take a close look now and find out what that figure is, then plan around it.
Having an emergency fund is strongly recommended even at the best of times – because the best of times don’t necessarily last forever. According to research by the Money Advice Service (MAS), 4 in 10 adults have less than £500 in savings – meaning that a relatively small unexpected bill, like a broken boiler, could push their family into the red.
Really you should try to have at least 3 months’ gross income saved for a rainy day, and up to 6 months’ if possible. If that’s a long way off, then start putting away a little every month from now on.
Buying a home
If you expect to be buying a home during the years surrounding Brexit, then be aware that prices may fall a little (around 5 to 8 per cent), especially in the £250-500k bracket. This may be good news if you’re a first-time buyer, as it may finally get you on the property ladder. If you’re simply moving from one home to the next then a price fall may not affect you. However, if you leave a gap between selling and buying (as many do to avoid a long chain) then you may benefit if prices drop in the interim.
On the downside, Job security is a vital element when securing a mortgage, and this may weaken across the UK as companies seek to maintain their profit levels in a harsher trading environment. We don’t yet know what Brexit may bring, but the worst-case scenarios could result in some firms cutting back or relocating.
It is also possible that interest rates (currently at a historic low) will rise to try and combat inflation. This may put pressure on those who already have a mortgage, and make it harder for first-time buyers to secure one. Conversely, it may further depress house prices – so there is an element of swings and roundabouts. (Paying down personal debt, however, will be essential if rates rise by much.)
One way to deal with job insecurity is to look at taking out redundancy cover. An adviser can give you information about this. Also check your employment contract to see what benefits you may have in case of long-term sickness or death. If you have a family, review your life insurance to confirm that it remains adequate for your needs (which may have changed since you took it out).
Protection can take many forms, and can be the most effective safeguard against the unexpected. Illness and accident can strike at any time, of course, but increased uncertainty in the wider world can make their impact more severe. In short, now is an excellent time to review your protection needs.
Keep calm and carry on saving
We can’t predict the future, but we can prepare for it. If you can manage to spend less than your income, clear your debts, build an emergency fund and put the right protection in place, then you should be ready to face just about anything – including Brexit. This type of financial planning isn’t exciting – we can all do without that kind of excitement. What it does is provide the stability to let you go on and do the nice exciting things: like buying a home, investing for your life goals and planning for retirement.
The above article was first published by unbiased on the 22nd February 2017