Financial Fire Drill

"I'm quite worried about the fiscal imbalances that we've got and what that might mean in terms of financial crisis ahead" - Bill Gates

Today's article has a long history. The Consumerist has an excellent blog posting called Prepare For A Budget Meltdown By Conducting A Financial Fire Drill. It summarizes a story by the NYT, Preparing Your Budget for Disaster which is turn is referencing a book called “The Two Income Trap.” So now that I've credited all concerned, here's the details...

You're fired! Now what? It's the nightmare scenario, and you can prepare for it by conducting a financial drill. Take a moment and pretend you have no income. Ask how you would pay pay for rent and food, and what lifestyle changes you could make on two week's notice. - Consumerist

Spending
When your earnings are reduced, you must cut your spending to match. "Restaurants, movies, cable, vacations, all of these can go."

Maintain & Reuse
Avoid buying anything new by using what you have until it literally breaks down or falls apart. Patch your clothes, fix things that break, drive your car until it is no longer road safe. I my family we drive our cars for about 10 years until our mechanic says they can no longer pass inspection (rust) or repairs exceed the current value of the car.

Borrow
Since your credit will dry up as your financial situation worsens, tap your credit lines while they're still available. But don't dig yourself into a hole you can not pay back. With the recession/depression you might be unemployed for a long time (it took me 6 months after I was laid off). Borrow only in case of emergency and only if you're confident you have funds to pay the monthly payments.

Readjust Your Assets
In my case most of my funds are in higher risk mutuals since retirement is years away. But if you have no job you might be forced to cash in your stocks and mutuals early. In this case it can be a rude shock when a market collapse like 2008 wipes out 50% or more of your nest egg. Consider moving your money to more conservative accounts until you start earning again.
Consider how much you can pull from your 401(k) and Roth IRA without incurring penalties. The Consumerist and NYT have the details.

Bottom Line
Keep in mind this posting is about a financial emergency like unemployment, NOT a way to find quick cash to buy a giant plasma TV for the Superbowl game. Borrowing to buy luxury goods is always a bad idea.