Four Steps to Stay Out of Debt In a Roller-Coaster Economy

In the face of an unpredictable economy, can you withstand a fiscal crisis? Here are four steps to take to protect your household from falling into debt during low financial times.

· Step 1: Prepare for the worst-case scenario.

Come up with a plan to live on less. You never know when you might lose your job or end up with unexpected bills. June Walbert, a financial planner with USAA, recommends taking out a mortgage that you can afford to pay on only one income, even if both spouses work.

· Step 2: Keep an emergency fund.

You need at least six months' worth of expenses in an emergency fund. Many people became lazy about emergency funds when it was easy to get a home-equity line of credit. But with lenders pulling back equity lines, it's important to build up your emergency fund again, even if it means temporarily decreasing retirement-plan contributions.

· Step 3: Lower your credit card rates now.

First, ask your credit card companies for a better deal, which can work if you have a good credit record. Or take advantage of a 0 percent balance-transfer offer -- just be sure to pay off the balance in full before the teaser rate expires, which is usually after six months.

· Step 4: Pay off your mortgage before you retire.

Most people aren't in a rush to pay off their mortgage if they have a low fixed rate and can earn more by investing elsewhere. But if you plan to retire soon, repaying that debt can give you a lot more flexibility, especially if your investments are down and your other expenses have increased -- which is happening to many retirees this year.