If you fear layoffs loom, get your financial house in order
— -- You can't help but notice the little signs at work that layoffs are coming. The closed-door meetings. The vanishing amenities, like the juice machine in the break room. The buzzards in your parking space.
The economy is slowing, and that means you need to be prepared. For the next three weeks, we'll be talking about how to navigate troubled financial times. Today, we'll talk about how to shore up your household balance sheet so you can survive a layoff.
Ideally, the best way to handle a layoff is to get a new job before getting canned, preferably one that will make the survivors insanely jealous.
Failing that, however, you need to make sure that your household can withstand the loss of income while you search for a new job. Your first step: Make a rainy-day fund.
Financial planners often recommend that you keep three to six months' worth of salary as an emergency fund. That's not quite as onerous as it sounds. First, they're talking about the amount of money you need to pay your bills each month, which is — or should be, anyway — less than your actual salary.
If you're in a profession that's in fairly high demand, you may not need to stash away six months' of living expenses. One or two may be enough. "The more uncertainty you have, the more you should save," says Kurt Brouwer, a financial planner in Tiburon, Calif.
Keep the cash in a money market mutual fund or a bank money market account. The average money fund yields just 4.2%, but you're not investing for the yield: You want a safe investment that will give you access to your money whenever you need it.
You will also need to reduce your expenses as much as possible. One of the best ways is to pay down your debts aggressively. Think of your debts as good debts and bad debts. Good debt is your mortgage, or any loan that charges less than 6% or so interest.
Bad debt is pretty much anything that charges more than 6%. A credit card balance that charges 18% interest? Bad debt. A credit card balance that charges 30%? Even Tony Soprano would agree that a 30% interest rate is a bad, bad debt.
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