Creating A Safety Net For Job Loss

I Make $6.50 An Hour, Am I Poor? is an MSN.com article is about how, Karen Datko, a 52 year old woman lost her job and slipped from middle class into near poverty. The article has a positive spin, Karen has avoided borrowing from her retirement savings, cut back living costs and taken multiple jobs in order to meeting financial commitments. While she has "no illusions" about returning to her former job, Karen has a positive can-do attitude about finding solutions to help deal with her situation.

The article has caused me to reflect about how dependent our financial security is on a regular paycheck. And how the loss of one's job can put oneself at significant financial risk. Losing a job could happen to anybody, including me.

Here are some strategies on protecting myself and my family for this risk:

Build a Bigger Emergency Fund. While most experts recommend 3 to 6 months of emergency funds, I think this level may not be sufficient for people who are married and with children. For example, a single person in their 20's has fewer fixed financial responsibilities (e.g. no mortgage) and can use many options to get a new job or reduce expenses, including move to a new location or moving back with parents (however undesirable this may be:-) On the other hand, a person who is married, with children and a large mortgage may have less degrees of freedom. Therefore, it may more difficult to reduce expenses or find a new job, and require a longer use of an emergency fund.

For my own personal situation, an emergency fund of of one year's gross salary is the the level I have chosen. To be clear, these funds serve a dual purpose. While the funds are available for emergency use, they also count in our retirement savings should we not need to use them. These funds are very liquid and accessible, being invested in short term bonds or money markets.

Build A Portfolio of Guaranteed Investment Income. In 2006, our investment income was equal to 1.29 times my gross salary. While that was an excellent investment return, only 19% of the investment income (or 25% of my gross salary) is guaranteed on a yearly basis. That part is invested in municipal bonds, CDs and money markets. That balance of the gain was due to growth in stock prices for both taxable and retirement portfolios.

It would be great if our savings could be guaranteed to generate about 30-50% of my gross salary on a yearly basis. This amount of guaranteed income would provide a good buffer should I ever need it as an emergency fund. This will be one of the items on which I will be working this year.

For more reflections on personal finance, check back every Saturday for the Reflections and Musings segment.

Photo Credit: morgueFile.com, Clara Natoli

This is not financial advice. Please consult a professional advisor.

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