Protect your Finances from becoming another Recession Victim

The first lesson of personal finance is to budget your income and spend wisely. The second lesson is to get even more conservative about your spending when recession is knocking at the door.

Today's economic times can have you feeling like one of those mechanical ducks in a carnival shooting game. There you are, moving helplessly through the routines of your life, knowing that you could be shot down at any moment by a layoff, health crisis, or other misfortune.

Now that the National Bureau of Economic Research (NBER) has confirmed a U.S recession, you have two options: you can ignore it and hope it doesn't affect you, or you can get proactive about protecting your personal finances from recession-oriented erosion. Presumably, you prefer the second option-so here's a roadmap to help you get started.

Budget, budget, budget

Recession can ravage your personal finances by cutting your pay, slashing your investment income, and making it harder to get credit. You can insulate yourself from these impacts by budgeting and building a cushion between what you make and what you spend.

Start by keeping a detailed record of your expenditures for one month. Then, enlist the perspective of a close friend. Review those costs together, and identify everything that isn't completely necessary. Add up the potential savings, and start tucking that money away somewhere safe. You'll need it later if something happens to your job.

Take the finance out of personal finance

If you have revolving debt, pay it off. Get creative about raising money, and then send the proceeds straight to your creditors. Try holding a garage sale, selling old toys on eBay, clipping coupons, refereeing local sports games, tutoring high school kids on the weekend, dressing up as Santa during the holidays, etc.

Diversify your assets and income

Take a close look at your assets and assess your diversification. Is all of your cash tied up in your home or in the shares of GE your grandma gave you? If so, make a plan to spread your wealth around. Admittedly, this will likely be a medium- or long-term project, but you should at least set your goal and chart a course of action. For example, you might choose to own your home outright and leave yourself with little cash liquidity. In this scenario, you'd have to build your cash reserves over time by saving small amounts every week. You also might have a poorly diversified stock portfolio with large unrealized losses. If you can't sell your existing positions, you'd have to diversify by adding to your portfolio in stages over time. 

You can also diversify your income. Options include getting a second job, renting a room in your home, or starting an online business. At the very least, you should polish up your résumé and ramp up your networking activities.

Just like the mechanical duck, you can't really hide from recession. The next best thing is to strap some battle armor on your personal finances to minimize the damage in case you do get hit.