Last updated 21:56, Tuesday, 28 October 2008

If the recent injection of capital into the banking system becomes the event which is seen to mark the end of the credit crunch, October’s increase in unemployment figures and fall in econmic output signals the beginning of the recession.

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Although inflation hit a 16-year high of 5.2 per cent in September, this is expected to start to fall as a result of lower commodity prices and a slowing economy.

As indicated by the 0.50 per cent reduction in the Bank of England’s base rate, recession has now replaced inflation as the key risk to the UK economy.

The signs are that many households have already changed their behaviour.

The latest survey from the British Retail Consortium showed like-for-like sales down 1.5 per cent compared to September 2007 and sales have been lower in six of the last seven months.

You know things are getting tight when Tesco reinvents itself as “the UK’s largest discount retailer” and one of the country’s leading banks starts encouraging us to save money by taking a packed lunch to work.

Unfortunately, there is no painless solution to managing your finances in a downturn and the key revolves around the old-fashioned virtues of planning and discipline.

It is important to build up a financial cushion to protect yourself in the event that things might go wrong.

This is what businesses call “capital” and what you and I might call “saving for a rainy day”. Most advisers recommend that you keep the equivalent of at least three months salary in an account which can be readily accessed, ideally without penalty.

If you haven’t used your tax-free allowance this year, an instant access ISA would be ideal.

While the tax breaks are designed to encourage long-term savings, there is no reason why you can’t use an ISA in the same way that you would use an instant access savings account.

The only difference is that you won’t pay tax.

You may also want to consider some form of payment protection cover in the event that you lose your job or are unable to meet your mortgage payments because of long-term illness.

If you have outstanding loans, manage these in the most cost-effective way.

Credit cards are great for tiding you over for the period between making a purchase and the settlement date, but they are a very expensive form of long-term borrowing.

Above all, exercise restraint. Most people have enjoyed a steady increase in disposable income over the last fifteen years. We have become used to buying what we want, when we want it, and low interest rates have made it easier to spread the cost over a longer period.

When the future isn’t certain, the strategy of ‘buy now pay later’ carries a far greater risk.

When things are going well, it is easy to develop a habit of spending money on a large number of small items without considering the overall cost.

Try keeping a list of everything you spend money on over the next week.

Add up all the unnecessary expenditure and multiply it by 52. You might be pleasantly surprised by the answer.

n Chris McDonald is head of marketing at the Cumberland Building Society.

n This article should not be relied upon when making investment decisions.

Always obtain financial advice.