How to Handle Your Job and Finances If There's a (Yikes!) Depression

[See what Warren Buffett is telling homeowners to do next.]

What is someone in their 30s or 40s to do now that their 401(k) is a 201(k)?
The good news is that you still have decades of compounding growth ahead of you. The bad news is that a 20 percent or 30 percent blow to your portfolio means postponing nearer-term financial goals like buying a house or taking that around-the-world trip. Assuming you have a stocked emergency fund, keep funneling money into your 401(k). If you can, kick those contributions up a notch to take advantage of the market's fire-sale prices, says Russell Fox of Apex Wealth Management Group: "Generally someone who's 40 doesn't have the largest nest egg they'll ever have, so they're not in a situation where preservation is the top priority."

It's also soul-searching time. Find out why you set up your portfolio the way you did, taking into account risk and time horizon. Then, with Terminator-like resolve, stick to your guns (allocations). "Nervous investors should at least continue building the bond portion of their portfolio, then tiptoe back into equities," says Ronald Rogé CEO of advisory firm R. W. Rogé & Co.

[See whether you should swear off stocks.]

And what if you're in the retirement "red zone" and don't have decades to rebuild your portfolio?
The idea of working during the traditional retirement years isn’t much fun, but it is practical. One of the best ways to give your retirement accounts a boost is to work another year or two. It will take the typical employee with 20 or more years on the job an extra 1.8 years working to recover recent market losses, according to calculations by Jack VanDerhei, research director of the Employee Benefit Research Institute. Delaying claiming Social Security also produces higher payouts. Benefit checks increase by approximately 7 to 8 percent for each year you delay claiming between age 62 and 70. And because Social Security is calculated based on your 35 highest earning years, each year you work in your 60s (assuming you earn more now than you did in your 20s) will further boost your checks in retirement. If you have already retired, it is more difficult to recoup market losses. But at least seniors over age 70 1/2 will not be required to take distributions from IRAs, 401(k)s, and 403(b)s in 2009, which will allow retirees who don’t need to tap their nest eggs an opportunity to avoid selling low.

[See 7 Ways You Can Still Retire During a Recession.]

OK, I'm going to totally hunker down and save like crazy. Any suggestions?
Consider extreme saving. Buying in bulk, making your own coffee, and freezing leftovers are all ways to cut your grocery bill down to under $7 a day. But by taking saving to the next level, only buying sale items, staying away from brand loyalty, and using coupons for most purchases, you can actually save up to $1,500 a month. Ashley Nuzzo, creator of the Frugal Coupon Mom website, uses a three-ring binder to keep track of her coupons, and typically cuts her shopping bill by more than half. In December, for example, she spent $711 and brought home $2,200 worth of food - much of which she ended up donating.

[See how to cut your living costs by 70 percent.]

Reading about a depression is depressing. What can I do about that?
Hey, don't worry. Be happy. It's hard to be grateful for what you have when your 401(k) lost most of its value and you have no savings, but it's probably the best thing you can do for your mental health. Sonja Lyubomirsky, professor of psychology at the University of California-Riverside and author of The How of Happiness: A Scientific Approach to Getting the Life You Want, suggests cultivating a sense of appreciation through something like a gratitude journal, where you write down three to five things for which you are thankful. If you lost your job, think of other dreams that have come true, such as living in the city you want or marrying the right partner. "It's not trivializing what's happening, but trying not to focus on it all the time," says Lyubomirsky.