The dreaded ‘R’ word – recession – has begun to rear its ugly head. A toxic combination of falling house prices, soaring energy bills, tighter lending practices and stock market jitters has sparked fears that the economy is teetering on the edge of disaster, with large-scale job losses and home repossessions to come.

However, in economically challenging times, there are ways to ease the pressure on your purse strings until the good times roll once more.

Savings

For anyone struggling with debts on overdrafts, credit cards or personal loans, the message is simple: do not save until the debt is cleared. However, for those who cannot bear not to put anything away, try halving monthly deposits until cashflow problems ease. When your finances are in better shape, increase the savings again. Kevin Mountford, head of savings at moneysupermarket.com, the comparison website, says: “Savers should consider their whole financial scenario before putting away too much money, especially if they have debt they pay interest on.”

Interest charges on your debts can cancel out any interest on savings.

When you do start saving again, do not be overzealous or you could end up back in financial difficulty. Regular savings accounts, where you invest a set amount for a fixed period, pay the most attractive rates, but they do not allow you to change the amount that you invest each month. Moneyfacts, the financial website, says that savers opting for one of these must fix their payments at a level that they know they can afford.

Mortgages

How much you can save on mortgage repayments depends on the type of deal you are on. Borrowers who have made overpayments on flexible mortgages are best placed to make changes. They can arrange a payment holiday or underpay for a few months, but only up to the amount that they had previously overpaid.

Borrowers struggling with monthly repayments on a capital-repayment mortgage could switch to an interest-only arrangement for a while, saving hundreds of pounds a year. For instance, on a loan for £150,000 with an interest rate of 5.7 per cent, interest and capital repayments would cost £939 a month, compared with £717 on an interest-only deal. However, most lenders charge a £50 fee to switch repayment methods and often ask to see evidence that a borrower has other investments that could eventually repay the capital.

Alternatively, extending the mortgage term will reduce the monthly repayments. For example, extending the term from 20 to 25 years will cut the monthly payments on a 5.5 per cent mortgage from £1,032 to £921. But remember that these are only short-term solutions and you should increase the repayments as soon as you are able.

David Hollingworth, of London & Country, the mortgage broker, says: “The danger is that borrowers may put off increasing repayments again, thus storing up trouble for the future.”

Insurance

It is unwise to scrimp on insurance. It may be tempting to cut out home, car or life cover to save cash, but a bill for thousands of pounds in the event of theft or an accident would more than wipe out any savings.

There are some less-important policies that could be ditched when the going gets tough. These include pet, medical and payment protection insurance. But those in dire straits may want to hang on to existing income-protection policies in case of redundancy.

Richard Mason, head of insurance at moneysupermarket.com, says: “Even someone on the breadline is legally bound to have car insurance and should really have home insurance, too. Life, medical and pet insurance are nice if you can afford them, but they can be jettisoned by the really hard-up.”

Many people have too much cover for travel or mobile phones because these are often included with bank current accounts or credit cards. If you have doubled up, cancel the most expensive policy.

It is possible to spread the cost of the policy if you pay by monthly direct debit, but this option usually costs more over the period. Steve Johnson, head of insurance at Sainsbury’s Finance, says: “Millions play Russian roulette by opting to do without insurance. People finding it difficult to afford insurance because of rising living costs need to ensure that they shop around for the best cover, as this can reduce the price dramatically. They should also consider buying online because many providers offer an attractive discount for this.”

Lost pensions

If you are in or approaching retirement, it could be worth checking whether you have any unclaimed pension money from former jobs. If you are unsure whether you have a pension from a previous employer, write to them and ask. Do not assume that you have nothing. If you don’t know who to write to, The Pensions Service (www.thepensionsservice.gov.uk) provides a tracing service with details of more than 200,000 schemes.

Jason Whitcombe, of Evolve Financial Planning, the independent financial adviser, says: “One client recently told me that he had a ‘small pension from an old employer that was probably worth nothing’. After a bit of research, I found it was worth £42,000. Although he wouldn’t have lost that entitlement, he now feels £42,000 richer.”

Direct debits

When was the last time you checked your direct debits? If it was a while ago, check for any forgotten items coming out of your account, such as a £3.99 monthly donation to charity that you set up three years ago, or a subscription to a magazine that is still being delivered to your old house.

Cancel anything that you no longer want to pay for, but call the payee first to let them know. Some companies, such as fitness clubs or broadband providers, may chase you for the cash even after you have cancelled the payments because you are still under contract.

Other outgoings that may be unnecessary during leaner times include premium banking fees of between £10 and £15 a month.

The best policy for quick cash

Homeowners hoping to release the money in an endowment policy have the option of cashing in their policy with the life company or selling it on the secondhand endowment market.

Aap, an endowment policy market-maker, says that policyholders can make as much as 35 per cent more cash by selling a policy rather than surrendering it before maturity.

Investors are keen to buy the policies, which are worth between £15,000 and £20,000 on average, because they offer steady growth for a low risk. Homeowners with policies close to maturity stand to gain the most from selling on the secondhand market. Dan Farrow, of aap, says: “How much you get depends on how mature the policy is, as well as the quality of the insurance company. Generally, the older the policy, the more valuable it is.”

However, this is not a good idea for those who need to use their endowments to pay off a mortgage. Policyholders who want a free quote should contact the Association of Policy Market Makers (APMM), which will circulate the policy details to members.

CASE STUDY: Mortgage cleared

Christine and Terry Gregory were unexpecctedly left short of cash when Mr Gregory, 54, a former roofer, developed an ear growth that left him unable to work.

With their income cut short, the couple, left, of Dagenham, Essex, decided to sell one of their three Royal London endowment policies on the secondhand market. They sold the policy, which had five years left to run, for £29,859, which was £7,000 more than the surrender value. They used the money to pay off their mortgage early to reduce their monthly outgoings.

Mrs Gregory, 57, says: “I sat down with a calculator and worked out that it would save us a lot more money over the next few years if we used the money to pay off the mortgage rather than hang on to it.”