Recession Proof

By Daniel Kadlec

So you want to be a hero? Go ahead--get those credit cards out and shop yourself silly. George W. Bush will be grateful. But remember, you're on your own out there. Retail sales are down. Car buying is depressed. Consumer confidence is fading. Last week GM and Whirlpool announced big layoffs. In November the S&P 500 stock index finished its first 12-month period of negative returns in a decade, according to Bianco Research. In other words, people are getting squeamish.

No, we're not in a recession yet, and we may well avoid the textbook version--consecutive quarters of negative real gross domestic product. But the economy is slowing so fast that it feels like a recession. Six months ago, real GDP was growing at a 5.6% annual rate. Goldman Sachs estimates that it will slow to 2.7% this quarter and 1.5% next. That's one of the fastest decelerations ever. Inflation is low, so the Fed has room to cut rates and maybe stave off anything terrible. Still, it looks like lean times ahead.

The irony of slowdowns is that they're caused, or at least deepened, by people doing smart things--tearing up credit cards, limiting purchases to stuff they really need. But when practiced in bulk, such level-headed frugality can shut down the economy. Friends, that's a risk you'll just have to accept. Let others prop up the economy if they can; you take steps to survive. Here's how:

--CREDIT CARDS/DEBTS Get rid of them. That's standard advice, and it's not easy to follow. But you don't want to enter a period of weak pay increases and diminished job security with hard-to-afford debt. Pay down high-rate debt first, and because rates should decline, pay fixed-rate debt ahead of floating-rate debt. Cash is king. You will get a better deal on things like cars and major appliances as manufacturers lure back customers. Keep cash equal to at least three months' expenses if you can. That's less important when you're debt free because you have ready access to credit. But be careful: banks are getting picky about whom they lend to, and may not renew your plastic.

--INVESTMENTS This is a bad time to dump stocks, which are already priced for a severe slowdown. They will fall further if a recession occurs. But if growth accelerates at the end of next year, as many expect, the market will lift off in advance. Stay diversified and mainly in blue chips. With mutual funds, consider those that invest in an index. Their lower fees help performance in a tough market. With bonds, longer maturities are best as rates fall.

--HOME If you're house hunting and frustrated by high prices and little choice, you may catch a break. Even if prices don't collapse, more homes will hit the market. And mortgage rates are falling. Don't wait too long. Rates will rise in anticipation of a rebound.

--INSURANCE Take higher deductibles to get lower premiums. Switch to term life, which is cheaper than similar policies with a death benefit. Auto coverage is rising, but underwriters offer highly specific policies. A good driver in a tanklike SUV (less likely to be hurt by bad drivers) can get a rate cut. Sounds wacky, given that SUVs are more likely to cause injury to others. But, hey, like getting frugal in a slowdown, it's O.K. to think of yourself first.

See time.com/personal for more on cutting debt. E-mail Dan at kadlec@time.com See him Tuesdays on CNNfn at 12:20 p.m. E.T.