Net Gains: Weathering a Recession

Fear losing your savings? Take these few simple steps to keep your wealth.

ByABC News
February 12, 2008, 2:20 PM

Feb. 13, 2008 — -- Times are tough, no doubt about it.

I'll leave it to the economists to debate when and if we'll fall into recession. What I'm thinking about are ways to withstand the turbulence.

No matter how unlikely you think it is that you will be caught up in the downturn, it's best to be prepared. If you're unlucky enough to lose your job, you'll be glad you acted ahead of time. And if you stay employed or remain in business, you will emerge from the turmoil with your finances in better shape than ever.

With that in mind, here are some steps to consider in the face of a possible recession.

Hoard cash: They say cash is king. And it sure comes in handy during tough times.

That's why building up an emergency fund should be the first step to consider. If you have one already, add to it. If you don't have a safety stash, it's time to start one.

Set aside the money outside of your day-to-day checking account in a bank account or mutual fund money market offering a competitive interest rate. FDIC-insured online banks may be the best place to look.

Apply now for credit line: If your emergency reserves are lacking, some homeowners may want to consider applying for a home equity line of credit as a backup in case of job loss or major medical bills. It's easier to secure a line of credit while employed.

I offer this advice with some hesitation. In a down real estate market, borrowing against your home can be a dangerous thing to do.

A home equity line of credit for emergencies makes sense if have a high level of equity in your home. But if you don't, home equity borrowing can push you into a situation where you owe more on the house than it's worth.

So be careful here. I'm talking emergencies here, not shopping sprees.

Pay down debt: If you have a decent emergency fund, consider applying extra funds to debt payments, starting with the highest-rate debt first. The lower your debt load, the easier it will be to withstand a personal financial emergency.

Smaller credit card or home equity loan balances mean lower required payments during tough times. And should things get really tight, you will have more borrowing capacity to help you get through an extended job loss or medical crisis.