KEEP YOUR SAVINGS SAFE

With the great recession looming and layoffs at record highs, it's tempting to give up and assume that no matter how much you plan ahead, it won't make much of a difference.

Actually, it makes a huge difference.

You can't control what's going on in the economy or the markets, but you can minimize the power they have over you. That's where short-term savings come in. Having enough money saved up to cover three to six months' worth of living expenses can be a huge comfort if you lose your job, get really sick or have to move in a hurry—or even if you just need to fix your car or air conditioner.

  1. Build an emergency cushion.

    Don't get hung up if you can't put aside enough to pay half a year's bills right away; three to six months is simply a rough target to aim for. Even a month or two is a lot better than nothing. (You can get a better sense of how much you need to live on for a month by using my Budget Calculator.)

    Everyone can save at least a little money every month. Work from what you're currently spending to set a concrete savings goal that you can actually achieve: $20 a month, $50 a month, $200 a month. It helps to break that number down into a daily goal as well so you know how much you're going to save every day. Sign up to have your bank automatically move that amount from your checking account into a savings account every month. It'll be there if you need it, but do your best to live within your new budget. After a while, your spending habits will adjust.
  2. Go ahead and leave this money in the bank.

    Ignore people who tell you it's dumb to keep money in a savings account paying just 1% or 2%. These accounts may not earn much interest, but at least you know they're probably not going to lose any money at all. With all the carnage we've seen in the stock market, that's not a bad deal, especially because this is the money that you want to be able to rely on in an emergency.

    At the moment, the federal government guarantees up to $250,000 in all FDIC-insured bank accounts, including certificates of deposit (CDs) and savings and checking accounts. That means that even if the bank fails, your money is safe.
  3. Get the best rate you can.

    Not all savings accounts are created equal. There are a lot of accounts out there that pay a measly 0.10% to 0.15% a year; at those rates, you'd have to keep $1,000 locked up in the bank for an entire year to earn a buck. Meanwhile, some banks—especially online or "direct" operations—are still FDIC-insured, but they're paying twenty times as much. It's a no-brainer. Sites like bankrate.com and bankingmyway.com will help you shop around for the best place to stash your cash.
  4. Look into money market funds.

    In addition to bank accounts, consider keeping part of your emergency savings in a money market fund, which is a special type of mutual fund that invests in short-term IOUs from companies and the government. Money market funds are traditionally very safe, but they aren't FDIC-insured. Throughout history, only two money market funds have lost money. In return for accepting that tiny (but real) amount of extra risk, money market fund investors tend to get somewhat higher interest rates than they would with most bank accounts. The safest type is money market funds that invest in Treasury Bills.

    You can buy money market fund shares at most mutual fund companies, such as Vanguard and Fidelity; iMoneyNet.com keeps a list of the highest yields out there.