What to Do While the Economy Tanks

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Don't you hate the double whammy? First the stock market plummets, and then the recession arrives. Depending on which commentators you believe, we're in for anywhere from a few months to a few years of leaner, tighter economic times. And we're heading into those times with a lot less money in our brokerage and retirement accounts.

Scary stuff. But there's action we can take to get through these tough times without too much suffering and, as always, some larger perspective that might help us sleep better and retain some good humor.

A road map for leaner times
Like the frog in the gradually warming pot of water, things might not have seemed all that bad to you until recently -- but I suspect that future economists and historians will decide that the recession really began several months ago. It's not arriving, it's deepening, and while that might seem like a distinction of dubious benefit, it might be comforting to think that coming months will bring incremental change, not a wholesale reversal of the present.

OK, maybe not. But if it works for you, run with it. Meanwhile, here are some concrete steps to take to batten down the hatches and get through the rest of the economic storm.

• Conserve cash and credit. This is probably a no-brainer for most, but it's worth reiterating anyway. Credit is tightening. Home equity levels are shrinking. Your back-of-the-mind emergency plan for financial catastrophe might have included tapping your home equity or maxing out credit cards. But home equity levels and credit lines are shrinking just as layoffs are looming at major employers such as Dow Chemical (NYSE: DOW), General Electric (NYSE: GE), Coca-Cola (NYSE: KO), and Hewlett-Packard (NYSE: HPQ). Now is the time to put off major purchases, pay down revolving credit lines once and for all, and stash some cash in an emergency fund. Start tracking your spending and cut where you can.
• Find alternatives to major expenditures. Can you put a little time and money into that old car and hang on to it for another year? Maybe you can find a bed for the guest room through Freecycle or Craigslist instead of buying new. There's no shame in buying used -- I'll bet the most financially secure folks in your neighborhood are already doing it, and nobody need ever know.
• Focus on preservation … Unless you're flush, now is an iffy time to be thinking about a bigger house, a new car or boat, or another big purchase of any kind. While there are tremendous values out there right now, and not just in housing -- an old friend who is involved in the collector-car market tells me that prices for used Ferraris are falling rapidly -- staying lean and focusing on debt reduction and preserving existing property ownership should be the highest priority for most families. Besides, you don't want to be trying to sell your existing house right now. Mine has been on the market since April, and … just trust me on this one.
• … but don't overlook opportunities. All that said, if you've been waiting for the right time to buy your first house or a vacation home, or saving for a something like a boat (or one of those used Ferraris), or looking to put a block of cash to work in the stock market, get out there and take advantage of others' panic and distress. As long as your credit cards are paid off and your emergency fund is funded, opportunities abound.
• Buy recession-resistant stocks. People cut back during tough economic times, but they don't cut all the way back. They still buy things like beer (Molson Coors (NYSE: TAP)) and cigarettes (Altria (NYSE: MO)) and toothpaste (Colgate-Palmolive (NYSE: CL)) -- and not coincidentally, all three of those companies are dividend-paying five-star CAPS favorites.

I've been saying for a while that stocks with recession-resistant dividends are a good thing to be holding right now. If you'd like some strong recommendations to buy today, I suggest taking a look at the Fool's Income Investor service. They specialize in exactly this problem -- stocks with great dividend yields that are also great long-term investments right now. You can look at their complete list of recommendations, including their best ideas for new money now, free of charge for 30 days. There's absolutely no obligation to subscribe.