5 Resilience to the economy’s ups and downs
The last two decades have seen a rollercoaster of dramatic events that have had major financial repercussions for all of us. The economic boom of the late 1990s and early 2000s was followed by the global financial crisis and then a recession in the early 2010s.
Events since 2020 have resulted in us experiencing a challenging and worrying economic roller coaster.
First, from early 2020 the COVID-19 pandemic had a radical impact on all our lives and on household finances. Whilst some households saw their incomes reduced others were able to boost their savings due to reduced spending on things like holidays and entertainment.
More recently there’s been a sharp rise in prices – particularly for energy and other household essentials like food and fuel – which is hitting every family. To make matters worse economic activity in the UK started to contract in 2022 with the Bank of England forecasting a long period of recession. By March 2023 this forecast was changed with a recession – two consecutive quarters of negative economic growth – no longer expected.
Those who have money put aside are fortunate to be better placed to cope with the subsequent price hikes and other economic challenges – emphasising again the role of savings as a financial buffer.
So – particularly in light of the experiences of recent years – if you are fortunate to have some spare money, what would you do with it now?
Activity 2: Using spare cash
If you find you have spare cash what would you do? Select all that apply.
The chances are that the answers may be a mixture of the suggestions above or some others not in the list. With rising inflation and higher bills the rainy-day fund is a sensible option.
Theory suggests that unexpected spare cash tends to end up in savings accounts (or other assets) rather than being spent (Friedman, 1957). It’s not clear this will be the full story for those fortunate to have spare cash as a result of Covid lockdowns. But if this is proved right then it would be good news for those families who were able to build up their resilience savings prior to the subsequent impact of higher prices on household budgets.
Hopefully there will be points in your working life when you have more money available, perhaps because your outgoings have reduced or you’ve got more money coming into the household. In these situations, it’ll be beneficial to save at least some of this extra money for the longer term.
We’ve covered many subjects in this session. Now it’s time to check your learning with another short quiz.