Personal Finance: Preparing for hard times

(Linda Stern is a freelance writer. Any opinions in the column are solely those of Ms. Stern. You can e-mail her at lindastern(at)aol.com.)

By Linda Stern

WASHINGTON, Nov 7 (Reuters) - The Fed is a little bit worried. The index of leading economic indicators is so-so, housing's still off, the stock market's skittish, and oil is flirting with the three-digit barrel. The last U.S. recession ended six years ago, so this expansion's a little bit old. It's all pointing to the specter of a recession in the not too distant future.

Maybe it won't get that bad. Many economists are suggesting the recession predictions are overly pessimistic. Instead, they say we're in for slow growth or stagnation. That's not much better, is it? Here's how to protect your family, yourself and your portfolio from the blahs.

-- Diversify your ability to earn money, to protect yourself from job loss. Take that Web design class, or set up that eBay biz you've been thinking about. Make a list, just for your own peace of mind, of ways you could earn extra money if you really had to.

-- Buy some CDs. The banks need cash and are continuing to prop up rates on certificates of deposit even though the Federal Reserve has been cutting short-term rates. Don't put all of your long-term money in the bank, but a few CDs, salted away and earning 5 percent or better for the next year or so, will do nicely.

-- Invest in toilet paper and the other necessities of life. Sure, this is conventional wisdom, but it works. Companies that produce items that people buy in good times and bad will reward investors who own their stocks, according to research firm Briefing.com. Some industries that have delivered 20 percent-plus returns during recessions include tobacco, health care, personal products, pharmaceuticals, paper packaging and footwear.

-- Buy dividends, too. If the economy stays weak or continues to falter, you might have to wait a while for your growth stock picks to pay off. Get paid to wait by choosing companies that pay decent dividends. You can screen for stocks yielding better than 3 percent, or buy an exchange traded fund that focuses on stocks that pay solid dividends.

-- Manage your debt. Do what it takes to kill the balance on your credit cards, even if it hurts. Rates on home equity lines and other variable-rate loans may falter, or at least stay relatively low, if the economy is weak, so use that opportunity to pay bigger chunks of principal. If you have a variable-rate mortgage and would like to swap it for a fixed-rate loan, you'll get your best opportunity in a downturn. Be prepared to jump on a new loan when rates fall to a level that's good for you.

-- Don't move. If you are renting and haven't bought a home, it won't hurt you to wait a little bit longer. Most housing analysts think the downturn in home prices hasn't finished. If you already own your home, it's not going to be a good time to sell. Stay put if you can.

-- Spend less and save more -- a time-honored tradition during troubled times, and with good reason. The less you spend and borrow, and the more you sock away, the less stressed your own personal economy will be. Make little changes, like using library books and videos instead of spending money at the movies and bookstores. Brew your own coffee and pour your own beers. Cook more of your own food. Send all that you save to the bank, or to vanquishing credit card debt.

-- Focus on cutting your energy and utility spending. Most people could significantly improve their household budgets if they limited the amount they paid to the cable, water, electric, gas and telecom companies. Wear sweaters and turn down the thermostat. Use your cell phone all the time and give up your landline. Say goodbye to HMO. Squeeze those monthly expenses now; you can always add more later.

-- Prepare for the better times. Downturns are followed by expansions that bring rising stock prices, home prices, job offers, salaries and the like. All of the careful planning you do now will get you ready to jump in when the economy recovers. Watch for early signs; election years are often good times for investors. Remember, you're not giving up gratification, you're just deferring it. (Editing by John Wallace)