We're experiencing a serious economic downturn, and you can't simply bury your head in the sand. It's vital you take action to escape relatively unscathed. Here's how to reduce the impact.

Reduce your debts

Lower home loan repayments and tax cuts may have increased your disposable income, but rather than just spending it, use it to pay off your debts.

Start with your credit card as it charges the most interest, then tackle loans and your mortgage. If you ignore interest-rate cuts and keep up your current home loan repayments, you'll pay off your property faster and save interest.

Spend smartly

Live within your means. Save up for things instead of putting them on credit, and think twice about expensive phone plans and trips - could the money be used to pay off debts? What would happen if you lost your job? Keep this in mind the next time you splurge.

Cut needless expenses

This is the easiest way to boost your savings. What can you live without for six months while you reduce your debt and build savings? It's amazing how daily expenses add up. Write your purchases down every time you open your wallet - you may spend $30 a week on takeaway coffee or more than $50 a week on lunches.

Increase your income

The job market's tough at the moment, but there are ways to add to the family income. Can you volunteer for overtime or extra shifts at work? Does your career allow you to freelance outside your regular work? You could also get a second job or start up a business on the side, such as altering clothes.

Create a kitty

Once you've paid off your debt, start an emergency kitty. If you or your partner lose your job, it will be a godsend. It's also useful for things such as the car registration or electricity bill. If you have an offset account attached to your home loan, store money there. It'll be available if you find yourself in trouble and reduce what you owe, so you'll pay less interest.

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