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Emergency fund eases unemployment pressures


From the time she was a little girl, Dorian Rehfield understood the importance of saving money. She has always made sure to set aside enough funds to cover a year's expenses just in case of an emergency.

She just never thought she'd actually need to tap into that account, as she is doing now.

Rehfield, 42, lost her job as director of marketing services when her Glen Cove, N.Y., company shut down in August. So she's now forced to live off her savings and unemployment, which is paying her about 14 percent of her salary, until it runs out in about three months.

"I felt those savings were for retirement," said Rehfield, who lives with her fiance in Huntington, N.Y. "I didn't think it would be going toward my electric bill, certainly."

Rehfield, actually, is one of the lucky ones. Many people who lose their jobs don't have an emergency fund to fall back on.

There are steps you can take to minimize the financial hardship of unemployment - and certain moves you definitely shouldn't make. While you are still working, it's important to set aside money to cover several months of expenses in case you are laid off or are unable to work for any reason.

Before setting up an emergency fund, keep track of all the money you spend in a month so you can get a more accurate idea of your expenses and see how much of your spending is discretionary, said Richard Bergen, a certified financial planner with ARS Financial Services in Jericho, N.Y. He recommends having a minimum of three months' worth of expenses, but preferably enough for six months.

An easy way to set up an emergency fund is through an automatic deduction plan that transfers money each month into an account. That way, you won't have to think about saving it and won't be tempted to spend it. Most of the money should be kept in cash so it is readily accessible, but with today's pathetically low interest rates, you could also consider putting a portion in short-term certificates of deposit or ultrashort bond funds, Bergen said.

If you are a homeowner, consider a home equity line of credit, which is easier to get when employed. Unlike the case with a loan, you don't have to draw upon it and start racking up debt and interest until you really need it.

If you have fairly decent credit, you can get an interest rate of 4 percent to 6 percent, said Bill Cafero, senior manager in Ernst & Young's personal finance practice. Another plus is that interest is generally tax-deductible.

Tapping into your home's equity, however, can be risky, since it adds to your debt burden. So don't draw on it unless absolutely necessary. Also, since the rates are variable, they are likely to rise next year if the Federal Reserve continues to raise interest rates, as expected.

Keeping your debt under control is even more critical if you are unemployed. The worst thing you can do is fund the time between jobs through credit cards.

"People try to maintain the standard of living they had when working, and this is a mistake," said Paul Richard, executive director of the Institute of Consumer Financial Education in San Diego.

Among the first things to do when you lose your job is to make a spending plan so you can figure out how to boost your income or reduce spending to avoid having more money flow out than in. List all your sources of income. Then, write down all your expenses.

Then, you must be ruthless in figuring out how you can either boost your income or cut any spending that isn't absolutely necessary. Spending more money than you take in will get you into a financial hole incredibly fast.

Tami Luhby is a staff writer for Newsday, a Tribune Publishing newspaper. E-mail her at yourmoney@tribune.com.

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