How to survive the next depression

Pile up cash

In bad times, cash is king. Your emergency savings will pay the bills if you lose your job and will generally help you sleep better at night. Set up automatic transfers into a high-yield, FDIC-insured savings account and add any windfalls you get along the way.

If you've been prepaying any low-rate, tax-deductible debt -- such as a mortgage or a federal student loan -- consider suspending those extra payments and putting the money into your savings instead to boost your financial flexibility.

Prepare for inflation

The Federal Reserve and other central banks will flood our financial system with cash as they try to encourage lenders to lend. Once the economy starts to turn around, all that cash sloshing around in the system could spark inflation that might be tough to bring under control.

To protect clients, financial-planning firm Evensky & Katz of Coral Gables, Fla., has been adding TIPS (treasury income protected securities) to the fixed-income side of its portfolios, says Taylor Gang, the firm's vice president.

"We feel that the long-term risk is likely to be inflation," Gang said, "and we construct portfolios with this in mind."

But the firm isn't telling clients to abandon stocks. Far from it.

"Through exposure to equities, clients own securities that are likely to appreciate in value," Gang said, "and outpace inflation over time."

To repeat:

Stay invested in stocks

This advice is hard for many people to stomach. They feel that if only they'd gotten out of the market weeks or months ago, they'd feel so much better now.

That's probably why so many are raiding their retirement funds, cashing them out or refusing to contribute. A recent AARP survey found that 20% of workers 45 or older had stopped contributing to their retirement funds in the past year and that 13% are tapping their accounts to pay day-to-day expenses.

These are exactly the wrong moves. While the current market turmoil may mean a delayed retirement for many people (see "How to retire in bad times"), failing to fund your retirement accounts could mean no retirement at all.

And the problem with getting out of the market is that you won't know when to get back in. Markets usually turn around well before the actual economy starts improving, and they typically advance so rapidly that people who aren't already invested miss most of the gains.

Besides, it's not like most of us need the money right now. Many of us have decades to go before we'll tap our retirement funds. These losses we're seeing are purely theoretical unless we act to make them real, by selling in a panic.

And if inflation does kick in, it will be even more important to have the inflation-beating returns that only stocks can provide. Furthermore:

Don't ignore your asset allocation

It may feel like diversification hasn't worked, since all classes of U.S. and foreign stocks have taken it in the teeth lately. But this synchronized performance is temporary, says financial planner Ross Levin of Accredited Investors in Edina, Minn. Eventually, a rebound will begin, and some of the most-beaten-down sectors will bounce back the strongest.

"Rebalancing is critical during these periods," Levin recently told his clients in a quarterly newsletter. "By systematically rebalancing, you are forcing yourself to buy low."

Learn some old-school skills

Plant a garden. Plan your meals. Repair rather than toss. Barter or trade rather than buy. Throw a potluck.

You'll save money, help the planet and combat that feeling that you're the helpless pawn of economic forces greater than you.

Construct your Plan B

If the bottom does drop out of our economy, you probably won't wind up on the street. Maybe you'd move in with your in-laws or rent out rooms in your home (as many previously affluent families did during the Depression). Honing your backup plan can be surprisingly therapeutic, particularly for people who tend to get all catastrophic. (For details, read "Is your money making you crazy?")

Instead of fearing the worst, in other words, you plan for it -- then hope to be surprised.

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

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