The first step in any good financial plan is to establish an emergency fund to handle life’s emergencies and break the cycle of turning to debt. However, some people feel a reluctance to use the fund in an emergency and turn to credit cards to cash flow each bump in the road. This phenomenon is driven largely by fear – fear that a bigger emergency will happen before adequate time to rebuild the [tag]emergency fund[/tag]. Here are a few strategies to combat that fear.

Think of your emergency as a personal line of credit. It might even help to sign up for an account that offers a debit card. I keep my emergency fund debit card in my wallet with one of those ATM card slips that says, “Break only in emergency!” When Murphy strikes I use that debit card to tap my emergency fund rather than turning to a credit card.

Hang on to your oldest, no-fee credit card until you have established several months of savings. By keeping one credit card with available credit you still have a backstop should you have the unfortunate luck of getting hit by two emergencies in the same month. Be sure that the emergencies are real emergencies – clearance items at your favorite store do not qualify.

Emergency funds should remain in a highly liquid account. The majority of your emergency funds should be socked away in a high-interest savings vehicle, like a savings account with a top online bank. We also keep a local, smaller emergency fund in an interest-bearing checking account (with debit card access). I could get a higher rate of return on this smaller amount elsewhere, but I have discovered that the higher the rate of return on my money the more pressure I feel not to touch it. This is especially true of holding an emergency fund in stocks or mutual funds. If the market is up, I don’t want to cash out because it might go higher. If the market is down, I don’t want to cash out until it goes back up again. Best to simply keep the emergency fund in easily accessible cash.

Make rebuilding your emergency fund a top priority after each expenditure. If your car died last week and the repair bill topped out at $600 you should quickly find a way to refund that $600 back to your emergency fund. Stop paying extra on your debts until that $600 has been replenished – minimum payments only. Take some extra overtime next week. Round up some old books and DVDs and sell them on EBay. The point is to make rebuilding that emergency fund your number one priority. Having that plan in place before the emergency will make it easier to swallow the $600 hit to your emergency fund, because you know it will be quickly replenished.

Much has been made in the news over the last few weeks and months regarding an impending recession in the U.S. economy. Talking heads spend hours and hours telling us what impact the recession will have on the global economy, but the average citizen in mainstream America just wants to know the impact on his personal economy. With that in mind I offer the following tips for surviving a recession.

Increase your cash position. Entering a recession proves to be a good time to increase your cash position. Not only does a healthy emergency fund help pave over short-term bumps in your household finances, it also allows you the opportunity to find some excellent deals in the investment and real estate markets. Institutional investors make a lot of money buying on the way down, and the same rules apply to the individual investor. If you are fully invested, or fully leveraged, you probably lack the cash to take advantage of these deals.

Consider allocating more investments to international markets. If the U.S. recession deepens it will have an impact on other markets because we are in a global economy. However, the losses may not be as severe, and other external factors may help international markets continue to grow even in a U.S. downturn. To hedge against deep domestic losses it’s always advisable to keep a percentage of your investments in foreign stocks. Entering a recession it might make sense to boost that allocation percentage in an international fund and reduce domestic investments, in the short term.

Get smart – learn a new skill or add to your current skills set to make yourself more “layoff proof.” True recessions are usually accompanied by massive layoffs. In this particular recession, the financial services industry could be hardest hit. Now would be a good time to consider taking that online class or pursuing some cross-training to make yourself more valuable to your organization. It might make the difference between getting a pink slip or getting a raise.

No Chicken Little, the sky isn’t falling, but just in case. Recessions tend to bring out a lot of doom-and-gloom commentary. I personally have faith in the U.S. economy and do not think we are headed into another depression. Still, it is a good idea to review your family’s emergency plan. Stock up on basic necessities, including non-perishable foods and a few gallons of water. Instead of running out and buying these things all at once, just pick up a few items along with your normal, weekly grocery trip and over time add to your stockpile. In our current environment this is something we should already have in place in the event of a disaster (natural or otherwise), and news of a recession serves as a reminder.

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You know Murphy, the guy that comes around and throws a giant wrench in your plans (also the author of [tag]Murphy’s Law[/tag]).  Lately, he’s been hanging out around our place and he has definitely overstayed his visit.  Last night my wife went to the refrigerator to start preparations for dinner and noticed that the food did not feel cold.  A couple months ago our fridge stopped working and we had to wait four days for a Sears repairman to visit, living out of a cooler during that time.  At some point during those four days the thing started working again, so naturally the repair man shows up and says everything is working fine.  The complex diagnosis cost us $60 in a non-refundable “service fee.”  We did get a few tips of things to try should it happen again, which we employed last night to no avail.

So, about 10:00 last night we embarked on a refrigerator cleanup throwing out most non-essentials and older leftovers.  I ran to the store to grab a few bags of ice and we transferred condiments, drinks and a few packaged foods over to a cooler.  Now we’ll wait it out for another visit from a repair man.  We aren’t paying another $60 fee, either.

Just when I thought things couldn’t get any worse I awaken this morning to discover a [tag]credit card[/tag] payment posted a day early, and resulted in five non-sufficient funds charges to my [tag]checking account[/tag].  Yes, five – for a total of $175!  I almost fell out of the chair.  I plan to visit my bank during lunch, hat in hand, and beg for mercy. I feel I owe at least one for my calendar error, but FIVE?

Both of these incidents remind me of the importance of a solid [tag]emergency fund[/tag].  The refrigerator dying and my banking screw-up have the potential to be a real budget-buster this month.  Assuming I have to pay for both Murphy attacks I can always move some money over from my emergency fund, and then replenish it when things return to normal.  I have to admit these two items have knocked the wind out of me, but without that padding I would be a lot more upset.

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