If your company and/or industry sector (e.g., retailing) are "shaky," you need to build a big emergency fund quickly. Slash your spending and start saving aggressively. Talk with your family about the need to spend less and save more. Then challenge family members to be as frugal as possible and celebrate their successes with inexpensive rewards. Plan free entertainment activities such as picnics in a park, DVDs borrowed from a public library, and "potluck" dinners with family or friends instead of eating out. Some financial experts recommend increasing emergency savings to as much as 8 to 12 months' expenses during a recession, compared to 3 to 6 months' expenses during better economic times.
If you've been saving money in tax-deferred college and/or retirement savings accounts, consider suspending your contributions temporarily and redirecting the money to build up your emergency fund. Put this cash in liquid assets such as a money market account or short-term certificate of deposit. If you lose your job, you'll have money readily available to pay your bills. If your job is spared, you can always use this money later for college or retirement.
Cutting expenses is important when there is uncertainty about one's income stream. Examine monthly expenditures to see where spending can be trimmed. If you are buying a vehicle with a current outstanding loan balance, it may be necessary to consider eliminating the loan payment by selling the vehicle. Unless the outstanding balance is greater than the value of the vehicle, using the difference between sales price and loan pay-off to purchase a less-expensive means of transportation is an option. It will be easier in the future when your income is more secure to upgrade to a newer vehicle rather than allowing late payments to bring down your credit score, resulting in less borrowing power.
We would like your feedback on this Personal Finance Frequently Asked Question.
