Liz Pulliam Weston

The Basics

Stock up, hunker down, worry less

Why not plan for the worst? You'll sleep easier, and it won't cost you a dime. Here are 8 ways to get your house in order.

By Liz Pulliam Weston

The good times have rolled for so long that many people have no idea what a real, gut-wrenching recession is like.

Sure, there was a setback after 9/11, and it hit some industries hard. But unemployment back then peaked at 6.3% after a contraction that lasted about a year. Real estate was still boiling along, credit was easy, and Americans were still spending like mad.

The recession of the early 1990s was definitely worse. The economy faltered for about a year, and unemployment peaked at 7.8% in June 1992.

But contrast that with the picture from the 1980s:

  • Two contractions that totaled 24 months racked the economy from January to July 1980 and from July 1981 to November 1982, according to the National Bureau of Economic Research.

  • Unemployment peaked at nearly 11% in November 1982 and remained over 10% until July 1983, according to the U.S. Bureau of Labor Statistics. Rates remained above 7% through most of 1986.

  • When joblessness was at its worst, the BLS reported the average length of unemployment at close to two years.

That's the kind of recession some economists fear may be headed our way. And though such economic turmoil is still a far cry from the Great Depression, when one-fourth of workers were jobless and one-third of the nation lived in poverty, your financial situation could be dealt a harsh blow if you're not prepared to ride out the bad times.

This go-round, you need to be prepared for:

  • A seriously tough job market. Massive layoffs are all but ensured in some industries, including auto production. Companies also are much quicker to shed employees these days than they were three decades ago; a number of companies are laying off workers in anticipation of a slowdown. Most people will stay employed, but if you do lose your job, it may take you longer to find a new one than it has in the past.

  • Less access to credit. Easy, relatively cheap credit helped many families smooth over the rough spots in recent years. If a breadwinner lost a job, the family could live on credit cards or tap a home-equity line of credit. These days, though, many lenders have frozen lines of credit and lowered limits on credit card accounts. See "Need a loan? Borrow like it's 1975."

Reduced access to credit and consumer fears about the future have already led to significant cutbacks in spending, as the bankruptcies of several retailers and casual-dining chains attest.

But just trimming expenses isn't enough. You need to make sure your money is going to the right places and that you're ready in case the worst happens.

The old-fashioned urge to stock up and get ready is the right one to follow, said Sheryl Garrett, the founder of the Garrett Planning Network, which represents fee-only financial planners who charge by the hour.

"Fill your (heating) oil tank; stock up your pantry," Garrett said. "If you've got a stay-at-home parent, prepare for that person to go back to work."

Video on MSN Money

Fear © Photodisc / Getty Images
The fear factor
Jim Paulsen of Wells Capital Management and Don Peebles, the CEO of Don Peebles Corp., discuss whether we are in a fear-based recession.

Specifically:

  • Fill your shelves. Every family should have a two-week supply of food and water in case of natural disaster or other emergency, according to the Federal Emergency Management Agency. Adding a few weeks' worth of shelf-stable foods can give you an even greater cushion in case you lose your job. For details on how to build your pantry, read "The emergency fund you can eat."

  • Consider prepaying your bills. In most cases, it makes sense to pay your utility and other household bills as they come in. But if you've got extra cash now and you struggle with keeping money in savings, it could make sense to pay your next few months of heating and light bills in advance. See the arguments for and against in this Get Rich Slowly blog post.

  • Keep your vehicles in good shape. Now is not a great time to add another car payment to your household budget. Fortunately, properly maintained vehicles can easily run for many years; for details, read "Make your car last 250,000 miles."

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  • Build that emergency fund. If you need ideas for trimming spending, see the Smart Spending blog. But cutting expenses is only half the battle. You also have to make sure that money isn't just spent somewhere else. Set up automatic transfers so the reductions in your spending get sent automatically to a high-yield savings account.

  • Get ready to cut your losses. If you're already struggling to pay your credit card minimums or you're behind on your mortgage payments, losing your job or having your hours cut at work isn't going to help. The longer it takes you to find another position, the further behind you'll fall.

Continued: Throw in the towel

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