A shaky stock market, job layoffs and a weakening economy are raising financial fears among many households that only a year ago were flowing with optimism. Even in good times, bad things can happen to families that cause a personal financial hardship. Here are some ideas for how to prepare financially for tough times.

Hold realistic expectations. Before high-tech stocks, and the stock market in general, took a nosedive in 2000, many people had come to believe that we had entered a "new economy" in which the stock market only went up and the economy was no longer subject to business cycles. How quickly reality threw cold water on that viewpoint. Simply understanding that stocks have been returning well above the historical average of around 11 percent, and that at some point they would fall to or below those averages, goes a long way in preparing for tougher times. Families who believe that stocks will return 20 or 30 or 50 percent every year are less apt to curb their personal spending and more apt to take chances on risky investments, both patterns that can come back to haunt you when the market drops and the economy sours.

Diversify, diversify, diversify. This is a cliché, but nonetheless one that's still true. Financial planners say they cannot harp on this enough. People most frequently think of this advice with regard to investing: spread your portfolio among a variety of asset categories, and investments within those categories. Executives heavy in company stocks and business owners whose wealth is mostly tied up in their company are especially vulnerable. But diversification also applies to other financial arenas. Spouses who both work for the same company or in the same industry face greater financial risk in a downturn. Diversifying job skills so that you can be more flexible, should you lose your job, can help when hard times hit. Diversification can apply to estate planning, where oftentimes it saves taxes to get assets out of the estate through lifetime gifting or irrevocable trusts.

Know your financial worth. Most people either don't know their net worth (assets minus liabilities), or think they know it and are wrong. Your net worth provides a useful benchmark for how well you are doing, in good times and bad.

Minimize debt and establish budget. Even the affluent often does a poor job of minimizing debt and budgeting. You might get away with this in good times, but excessive debt and poor use of your money become an albatross when financial times toughen. Reducing high-interest debt, budgeting, strategic tax planning and buying smart (from insurance to autos to groceries) frees up money to bank for those emergencies. 

Insure against tough times. You can't insure against layoffs, but you can insure for another common work disaster: a disability. Yet disability (income-replacement) insurance is one of the most overlooked types of insurance. Business owners also are commonly underinsured. Consider an umbrella liability policy, lawsuits are a common source of personal financial crisis these days.

Educate yourself financially. Perhaps there is no better way to prepare for hard times than to educate yourself, and your spouse, about how to wisely manage your money. It's often not so much the financial successes we have than the financial mistakes we avoid that keep us financially healthy in difficult times. 

Actively manage your money. People tend to let circumstances dictate their financial decisions, not the other way around. Taking charge of your finances, planning and saving for tomorrow, and following through on the advice of your financial advisor or your own planning usually make the difference between suffering through hard times or riding through them with confidence.

 This article was produced by the Consumer Affairs Dept. of The Financial Planning Association and provided to you courtesy of Nigel B. Taylor, CFP, Santa Monica, California. If you have any questions or concerns regarding this, or any other financial topic and are a resident of Southern California, please call me at 1-800-444-2237 (California residents only please), or click on the "MORE INFO" button to arrange for a free initial consultation in the comfort of your home or office.