investing

Deflation: Is it real? What can you do?

But don't overhaul your investment portfolio on just the possibility of deflation, says Bankrate's McBride.

"A well-diversified portfolio will, by virtue of being diversified, have some protection against a deflationary environment -- such as cash and high-quality government and corporate bonds," he says.

For consumers, a tanking stock market is bad enough, but it's not the only danger lurking in deflation.

Debt becomes more expensive.

Paying down costly credit card debt is never a bad idea, but in a deflationary environment, debt will be even more of an anchor on a household's finances.

"You will pay off your debt in the future with dollars that are worth more than they are today. So paying off your debt is extremely important," says Mickey Cargile, founder and managing partner of WNB Private Client Services and Cargile Investments.

In an inflationary period, workers get more dollars to pay off stable debts. However, in a deflationary economy, the opposite is true.

"In an environment where deflation persists for any period of time, your debts become more onerous. Your income is dropping but the $500 car payment is still a $500 car payment," says McBride.

If you're not already budgeting your income, then there's no time like the present to get started. Funnel as much extra income as possible into debt repayment and an emergency savings account.

While no one can control the economy or even predict that they'll be gainfully employed one year from now, paying down debt and building substantial cash reserves can help mitigate the impact of any unforeseen financial shocks.

Plus, you'll be in a better position to profit when the economy improves. But improvement won't happen without a little more struggle.

"We're deleveraging the country. And that is going to bring down growth rates. It's simple math. It's something that is good; we're paying the price for the leverage that we have put on for the past 20 years," says Cargile.

"It's not a quick fix, but ultimately we will emerge with a stronger economy," he says.

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