A recession seems like a very real possibility right now. The good news: there’s still time to prepare. Start by following these eight tips for protecting yourself against the recession:

Save Aggressively

1. Cut your expenses. Create a realistic budget and stick to it. Prior to any purchase, whether it’s a new TV set or a Starbucks frappuccino, ask yourself, do I really NEED this item, or do I just WANT it?

2. Generate a little extra cash. Declutter your home and sell stuff on eBay.  Put ads on your blog (don’t have a blog? Start one. Read this article on How To Blog) and try to place them in a way that will optimize click-through rates.

3. Pay off debt more aggressively. Consider taking advantage of current low interest rates to pay off as much debt as you can, especially credit card debt.

4. Create an emergency fund. Try to keep between three and six months’ worth of living expenses in short-term investments. This is especially important during an economy slowdown, because people do lose their jobs more often during a recession. Your emergency fund should be held in an FDIC-insured account, or in short-term treasuries.

Protect your portfolio

You don’t necessarily need to make any changes to your investment portfolio. I don’t plan on changing my investment mix: our portfolio is quite conservative as it is. We have an emergency fund, a good mix of stocks and bonds, and reasonable exposure to foreign stocks. So I pretty much plan to stick with my convictions and wait out the recession.

However, if you feel you might be too exposed to a slowing stock market, here are a few things you can do:

5. Change your asset allocation. Don’t pull out of the stock market entirely, because you do want to benefit from the eventual upturn, but this might be a good time to unload the losers in your portfolio and use the money for buying quality municipal bonds or treasuries.

6. Diversify.

6.1. Allocate part of your investments into international stock. The standard formula calls for 15%, but we choose to be more aggressive and keep around 25% of our stock portfolio in foreign stock. We’ve been very happy with DODFX (no load, expense ratio 0.66%). In addition, we have some exposure to emerging markets, China, Japan and Europe.

6.2. Make sure you don’t have more than a small percentage of your portfolio in any one company. Specifically, many financial advisers recommend that employees invest no more than 10% of their retirement money in their company’s stock.

Protect your job

7. Do your best to keep your current job. Especially if you work at a large, stable company. Make sure you are perceived as valuable at work. Ideally, you want to be at the top 10% of your company to avoid the layoffs, which ARE more common during a recession.

8. Prepare for layoffs. Put more effort into networking. If you lose your job during the recession, the best way to get a new one quickly is through your network of friends and colleagues. LinkedIn, Facebook and other social networking sites are great for maintaining and expanding your network. Keep in touch with people and help them as much as you can, without expecting anything in return – for now.

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I am not a financial adviser. The information provided here about protecting yourself against a recession is general in nature.

Photo credit: Anders V

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