How's Your Emergency Fund?

Living in California, I have grown used to the idea of keeping an "emergency kit" in the event of an earthquake. It makes sense to have water, canned food, flashlights, spare clothes and cash on hand to carry you through a temporary disaster.

But what if the temporary disaster is the sudden loss of your job? That's an earthquake of an entirely different nature. Do you have an emergency kit — or fund — ready?

If you get laid off, you may get a severance package — a few months' worth of salary, if you're lucky. But what about health insurance coverage? Often you have to pay for COBRA, which allows you to stay on your employer's health plan and is very expensive. That's just one surprising expense you might discover, and it can quickly sap your severance.

To ease the hardship of a potential job loss, save at least three months' worth of living expenses in a fund reserved for such an emergency. Many financial planners suggest a six-month reserve of expenses is a more effective hedge against hardship.

Whether you opt for three or six months, the task isn't easy, especially in a society that has forgotten how to save. The economic meltdown we're in is partly due to our overspending habits, yet that very meltdown is now jeopardizing jobs. Having an emergency fund is critical right now!

For more great ideas on the financial aspects of a job-loss emergency, read "6 Ways to Save for an Unexpected Job Loss."

"Everyone should have an emergency fund," says consumer finance expert Dayana Yochim in the article. "And remember that a line of credit should never be considered an emergency fund."

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