How to survive (and thrive) in a recession

This post comes from partner blog The Dough Roller.

Make no mistake about it -- a recession is here. While we do not know how long or painful it will be, we do know that it has the potential to be the worst financial crisis any of us have ever lived through.

The stock market lost more than 20% in 10 trading days. Retirees and those nearing retirement have seen their nest egg eroded, some by 30% or more. And the banking system is under severe stress in the United States and globally. That's the bad news. Now for some good news.

There are steps we can take now to better prepare for potentially difficult financial times ahead. There is no silver bullet that can insulate us from any financial crisis, of course. But there are basic things we can do to make sure we are as ready as we can be to weather the coming financial storm.

• Bing: When will the recession end?

My family and I are implementing many of these suggestions, which I'll share with you now. I've organized these suggestions into three categories: income, expenses, and saving and Investing. But before we get to the categories, there is one overarching reality we must come to terms with.

Don't panic. I am simply amazed at the panic selling on Wall Street that we have seen in the last week or so. We read book after book that tell us that selling out of fear is the worst thing one can do, but we do it anyway. People are afraid. I'm not immune to fear myself. But you can be afraid without panicking. If there was ever a time for clear, rationale decision-making, it's now.

Protect your income

Protect your job. For most people, keeping your job in a recession should be the No. 1  priority. This may mean putting in a few extra hours, working a little harder, and improving your skill set. Those who stay employed during a recession generally weather the storm just fine. While the unemployment rate is still relatively low, it very likely will go up. And the last thing you want is to be looking for a job with an unemployment rate of 8%, 10% or even higher.

Be ready for layoffs. While we should do everything we can to keep our jobs, some layoffs are inevitable. And it may happen to me; it may happen to you. No matter how secure you think your job is, be ready for the unthinkable. This means having your resume updated, knowing what friends and colleagues you'd contact for job opportunities, and knowing where you would apply for a job. Some time ago I published an article with some tips and online resources on what to do if you lose your job. It's worth checking out.

Earn extra money. I've long preached the benefits of earning a second income. I make extra money blogging, but that's just one of many, many ways. The beauty of extra income is that it goes right to the bottom line. If you need $5,000 a month to live on, even $1,000 a month in extra income extends your emergency fund by 20%. It can make a huge difference if you ever lose your job. Here are some ways you can earn extra money.

Reduce your expenses

Evaluate your mortgage. One of the positive elements of our current financial crisis is that interest rates are low. I'm old enough to remember the late '70s and early '80s when we had double-digit inflation and interest rates. Today, interest rates are still at historic lows. If you have an adjustable-rate mortgage, it's time to see if you can refinance to a fixed-rate loan. Notwithstanding what we all hear on TV or read in the papers, those with good credit can still get mortgages. I know this won't apply to everybody, but if you can lock in a low, fixed-rate mortgage, you eliminate the risk of rising interest rates.

Refinance high-interest credit cards. If you are paying high interest rates on credit cards, consider moving the balances over to a 0% APR balance-transfer card or a low-interest credit card. When considering this option, keep three things in mind:

• The interest rate after the introductory offer. Zero percent introductory rates do not last forever, so make sure you know what the interest rate will be once the 0% expires. You don't want to end up in a worse situation than when you started.

• Balance-transfer fees. Today, virtually all balance-transfer credit card offers charge a fee for the transfer. Typical is 3% of the amount transferred, but many offers cap the fee at either $75 or $90. Make sure to avoid unlimited fees if at all possible.

• Don't use the card for anything else. One of the big gotchas of credit card balance transfers is that if you use the card for purchases in addition to the balance transfer, your purchases usually get charged interest. The problem is that any extra payment you may make will go to your 0% balance first, not the portion that is being hit with interest. Currently pending credit card reform legislation would change this practice. But for now, don't use your balance-transfer cards for any other purchases if at all possible.

Reduce spending. This is obvious, but it is important to recognize that there are many ways to cut spending. Did you know that most Internet services come with different Internet speed options? I switched to a slower speed, saved $10 a month, and have not noticed the change. The point is that there are literally thousands of creative and painless ways to save money. Pick those that work for you, and start saving now. As part of this, seriously consider a cash-back credit card. If you pay off your balance every month, these cards are a great way to reduce your expenses by getting 5% or more back on your purchases. One of my favorite cash-back cards is Blue Cash from American Express, a Consumer Reports pick that pays up to 5% cash-back rewards.

Saving and investing during a recession

Don't stop saving for retirement. I have not changed one thing about my investment during the market decline. I've not sold any of my investments. I've not reduced the amount of my 401(k) contributions. As Warren Buffett would say, I'm trying to be "greedy when others are fearful" (or at least not fearful when others are fearful). I won't kid you; it ain't easy keeping my money in the market during a free fall. But I am convinced that what we do with our investments now and in the immediate future will dictate more than anything else how much we have at retirement. Of course, I have 25 years before retirement. Your situation may be different. But selling out of fear is a sure way to lose buckets of money. Whether you invest in a 401(k) or IRA, or even an SEP IRA, keep investing.

Rethink your emergency fund. It is more important now than ever to have an emergency fund. How much is always the question. I think six months is reasonable, but it depends on many factors. If you are married, do you both work? If so, you might get by with three to four months. Do you have assets you can sell if you had to? We have two cars paid off and could sell one if necessary. Whatever your situation, building up your emergency fund is critical, and I would keep it in a high-yield FDIC-insured online savings account.

Don't rely on a home-equity line of credit. This point is critical. You may have available credit on your home equity, but did you know the bank can eliminate that credit? Go find your home-equity line agreement, and you will see that if the value of your home falls or your financial situation changes, the bank can reduce the amount of your available credit.

In the end, our motto should be this: Hope for the best, but prepare for the worst. Amen.

Other articles of interest at The Dough Roller:

• Should you sell investments to pay off credit card debt?
• How to turn gift cards into cash
• Tutorial: How to start a moneymaking blog