1         Failing to Have a Safety Net

It is never a good idea to be without a financial safety net. During a recession or a bad economy, failing to plan for emergencies could mean financial ruin. If you are only a paycheck from disaster, it is likely you need to establish an emergency fund.

How much should you save in that fund? Financial advisors usually recommend the fund cover three to six months of living expenses. You may want to increase that if your income is volatile and sporadic – for example, if you are self-employed and/or a part-time worker.

See the article “Why You Need an Emergency Fund” in Kiplinger magazine for common excuses that keep people from starting to set aside funds for an emergency.

Break down your progress toward this goal into manageable steps so you do not get discouraged. See the article “Set Up An Emergency Fund” at MSN Money to help you consider different aspects of setting up an emergency fund that best fits your situation.

 2         Selling Low, and/or Incurring Penalties When Selling

“Buy low, sell high” is the often-repeated rule of dealing with long-term investments such as equities. But when the daily news about the economy is bad and getting worse, it is easy to give in to fear and let the emotional part of your brain rule.

However, if you pull your assets when the stock market is down, you are “selling low” and likely losing a lot of money in the process. Additionally, if you are pulling equities from IRAs or other accounts with restrictions, you may be subject to penalties and taxes for early withdrawal.

According to the article “Maybe Investors Should Buy, Buy, Buy and Hold” in The New York Times, in a particularly bad economy, riding out a bad market may no longer be enough. Depending upon what you have already invested, and what you need to accumulate for retirement or other goals, you may actually need to increase your rate of savings.

It also may help to be aware of humans’ built in physiological responses to stressful situations. These responses can affect your ability to make rational decisions regarding finances. This PBS interview, called “Of Mutual Interest” and conducted with an investing professional, talks specifically about the human brain’s response to stress.

 3         Living above Your Means

Do you know how much money is coming into your household, and how much money you are spending? Are you spending more than you are bringing in? This is never a good strategy, particularly during tough economic times.

Rectify this by taking the following steps: 

- Total your monthly income 
- Total monthly expenses 
- If expenses are greater than income, decrease expenses below income.

These simple-sounding steps may take some effort if you have never before tracked household income and expenses. A number of resources can help you set up a system to track your expenses. Free budgeting worksheets by BetterBudgeting.com are available at the bottom of their Web site – click on any of several links. Software such as Quicken allows you to customize expense categories for your household.

Once expenses are tracked for a month or more, you can determine which expenses to cut. The article “Save Money on Practically Everything” in Kiplinger magazine is one resource of many in looking at ways to save money and cut expenses. Common areas where people may find they can trim spending: eating out, travel, home entertainment, and groceries. Find the strategy that works for your household, and stick with it. You will be developing good habits to weather the bad economic times, and to create wealth when the economy improves. 

 4         Neglecting or Ceasing to Invest for Retirement

A difficult economic downturn is not the time to stop saving for retirement. In trying economic times, you may actually need to accelerate your savings toward retirement goals. It is worth taking a look at whether your portfolio needs rebalancing – on your own or with the help of a financial advisor. It may also be a good time to reassess your stomach for financial risk. Understanding your tolerance for risk can help decide which investments do or do not suit you. The New York Institute of Finance Web site has an assessment tool that can help you understand yourself and risk.

 5         Increasing or Maintaining Debt

A recession is not the time to be in debt. If you have no debt, you are in better shape than many. Do not make the mistake of incurring unnecessary debt during shaky economic times. If you have built and maintained an emergency fund, this fund should help you avoid going into debt to take care of emergencies.

Additional Resources 

- Coupons for online and location-specific goods (groceries, toiletries, etc.), gifts, services, and entertainment can be found at these Web sites: www.boodle.com, www.smartsource.com, www.valuepage.com, and www.upons.com. 

- See whether you are having too much withheld from your paycheck by using this calculator at www.kiplinger.com/tools/withholding/index.php. If you are able to free up extra cash, this can be used to pay down bills or build your emergency fund. 

- This Money Magazine article suggests considerations before cashing out your investments. 

- This Kiplinger's article outlines basic tenets of financial security.