How to build emergency fund
One way to prepare for such a scenario is to build an emergency fund.
Without a cash reserve you can easily tap, an unexpected expense could turn into a quicksand of debt. That's why financial planners widely encourage people to set aside some cash for life's surprises, whether it's a layoff, medical scare or home-repair bill.
Wall Street workers aren't the only ones feeling tentative these days, either. Last month, national unemployment bolted above 6 percent for the first time in five years. Economists say the figure will only climb in the months ahead, driven in part by unemployment claims arising from Hurricanes Ike and Gustav.
"Nobody knows where the market is going to be in a few months. We need to be carrying a little more cash now for a lot of reasons," said Lisa Kirchenbauer, a certified financial planner and president of Kirchenbauer Financial Management & Consulting in Arlington, Va.
So if you don't already have an emergency piggy bank, some points to remember as you get started.
A rule of thumb is to save between three to six months of expenses. Where you fall in that range depends on how quickly you think you'd find a job if you were laid off.
These days, you may want to err on the side of safety — especially if you work in a volatile industry.
"Even nine months may not be too much, if you think it's going to be difficult to reposition yourself," said Ellen Siegel, a certified financial planner and president of Ellen R. Siegel & Associates in Miami.
People higher on their industry's pay scale may also find it tougher to recover from a layoff, she said.
Those who work in an industry where demand for labor is high — such as nursing — might feel comfortable having just three months of expenses on tap.
The next step is figuring out how much money you need to get by each month. You should start by tracking your expenses, both fixed and variable. As you figure out a target savings goal for what you may need during a period of unemployment, recognize that you can probably be a bit conservative as you'll likely be able to spend less than you normally would.
"Food and clothing — that's a lot more variable. You can really cut back with careful shopping," Siegel said.
Don't factor potential unemployment benefits into the equation, because you might not be eligible. Your financial emergency also may not be related to a job loss — it could be an unexpected medical, car or home expense.
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